Getting to 2050: Canada's Transition to a Low-emission Future

Letter from the Chair

Dear Minister:

On behalf of the National Round Table on the Environment and the Economy (NRTEE), I ampleased to transmit to you our final Advisory Report entitled Getting to 2050: Canada’s Transitionto a Low-emission Future. This report is the culmination of a year of research, analysis, consul-tations, and deliberations by the NRTEE. This program was undertaken following a formalrequest by the Government of Canada in Fall 2006.

Our findings and recommendations are based on extensive, original modelling and dataanalysis that were, in turn, subjected to further consideration by numerous industry andenvironmental experts and stakeholders across Canada. The Advisory Report sets out clearrecommendations for effective action to achieve the government’s stated goal of deep, long-termgreenhouse gas emission reductions of 65% below current levels by 2050. It concludes thatachieving the government’s long-term goal is feasible with the right policy pathway, and will resultin significant GHG emission reductions at a manageable national economic cost over the long run.

The most central recommendation in that policy pathway is to establish an economy-wideprice on carbon as soon as possible. Our research shows that sending such a price signal is themost effective means to achieving the government’s deep GHG emission reductions. Ourresearch also indicates that delay in doing so will affect our ability to achieve these targets withouthigher economic and environmental costs, and that certain sectors and regions of the country areimpacted more than others. For these and other reasons, we have also set out five key “enablingconditions” that should be considered as Canada transitions to a pathway for achieving deepemission reductions.

We are aware that some of our recommendations may be challenging and will generate fulsomedebate. They are provided on the basis that an important NRTEE role is to consider long-termpublic policy solutions beyond current approaches. This is meant to inform the public policydebate to assist government and others to consider how best to transition to our proposed long-termclimate policy framework. The NRTEE welcomes the opportunity to provide this advice andinformation to the government based on our unique and proven role in bringing Canadianenvironmental and economic interests together to agree to consensus solutions on sustainabilityissues. This report bears that same hallmark.

An additional Advisory Note on national ambient air quality objectives will follow in early 2008.

Sincerely,

Glen MurrayChair

NRTEE MembersChairGlen MurrayToronto, Ontario

Vice-ChairDavid KerrToronto, Ontario

Vice-ChairRobert PageTransAlta Professor of EnvironmentalManagement & SustainabilityInstitute for Sustainable Energy,Environment and EconomyUniversity of CalgaryCalgary, Alberta

Janet L.R. BenjaminNorth Vancouver, British Columbia

Pauline BrowesToronto, Ontario

Angus BruneauChairmanBoard of DirectorsFortis Inc.St. John’s, Newfoundland and Labrador

David ChernushenkoPresidentGreen & Gold Inc.Ottawa, Ontario

Francine DorionVice-President of Environmentand TechnologyAbitibi-ConsolidatedQuebec

Richard DrouinCounsel at McCarthy TétraultMontréal, Quebec

Timothy R. HaigPresident and CEOBIOX CorporationOakville, Ontario

Christopher HilkenePresidentClean Water FoundationToronto, Ontario

Mark JaccardProfessor, School of Resource andEnvironmental ManagementSimon Fraser UniversityVancouver, British Columbia

Stephen KakfwiYellowknife, Northwest Territories

Ken McKinnonChairYukon Environmental andSocio-Economic Assessment BoardWhitehorse, Yukon

Kerry MorashClarica AdvisorLiverpool, Nova Scotia

Richard ProkopankoDirectorCorporate Affairs for B.C.Alcan Inc.Vancouver, British Columbia

Wishart RobsonClimate Change AdvisorNexen Inc.Calgary, Alberta

Robert SlaterAdjunct ProfessorEnvironmental PolicyCarleton UniversityOttawa, Ontario

David McLaughlinNRTEE President & CEO

National Round Table on the Environmentand the Economy

About Us

The National Round Table on the Environment and the Economy (NRTEE) is dedicatedto exploring new opportunities to integrate environmental conservation and economic development,in order to sustain Canada’s prosperity and secure its future.

Drawing on the wealth of insight and experience represented by our diverse membership,our mission is to generate and promote innovative ways to advance Canada’s environmentaland economic interests in combination, rather than in isolation. In this capacity, it examinesthe environmental and economic implications of priority issues and offers advice on howbest to reconcile the sometimes competing interests of economic prosperity and environmentalconservation.

The NRTEE was created by the federal government in October 1988. Its independentrole and mandate were enshrined in the National Round Table on the Environment and theEconomy Act, which was passed by the House of Commons in May 1993. Appointed byGovernor in Council, our members are distinguished leaders in business and labour, universities,environmental organizations, Aboriginal communities and municipalities.

How We Work

The NRTEE is structured as a round table in order to facilitate the unfettered exchangeof ideas. By offering our members a safe haven for discussion, the NRTEE helps reconcilepositions that have traditionally been at odds.

The NRTEE is also a coalition builder, reaching out to organizations that share ourvision for sustainable development. We believe that affiliation with like-minded partners willspark creativity and generate the momentum needed for success.

And finally, the NRTEE acts as an advocate for positive change, raising awareness amongCanadians and their governments about the challenges of sustainable development and promotingviable solutions.

We also maintain a secretariat, which commissions and analyses the research requiredby our members in their work. The secretariat furnishes administrative, promotional andcommunications support to the NRTEE.

Table of Contents}Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1 Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1.1 Clean Air Act Reference and NRTEE’s Advice . . . . . . . . . . . . . . . . . . . . . . 11.1.2 Federal Regulatory Framework and NRTEE’s Reference. . . . . . . . . . . . . . . 31.1.3 Conceptual Framework. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.2 Important Context and Assumptions

of the NRTEE’s Greenhouse Gas Advice . . . . . . . . . . . . . . . . . . . . . . . . . . 41.3 Transition to 2050 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Managing the Transition to a Low-emission Future . . . . . . . . . . . . . . . . . . . . . . . . 112.1 Enabling Conditions for Managing the Transition . . . . . . . . . . . . . . . . . . . 112.1.1 A Note on Our Modelling, Assumptions and Caveats . . . . . . . . . . . . . . . . 122.1.2 Canada Acting in Concert with the World . . . . . . . . . . . . . . . . . . . . . . . . . 132.1.3 Policy Certainty Beyond the Short Term is Central. . . . . . . . . . . . . . . . . . . 142.1.4 An Economy-wide Emission Price with Complementary Policies . . . . . . . . 202.1.5 Technology Deployment Will Be Imperative . . . . . . . . . . . . . . . . . . . . . . . 312.1.6 Air Pollutant Reductions and an Integrated Approach . . . . . . . . . . . . . . . . 332.2 Understanding the Economic Risk and Uncertainties of the Transition . . . 362.2.1 Long-term National Economic Growth Prospects. . . . . . . . . . . . . . . . . . . . 362.2.2 Regional and Sectoral Outcomes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382.2.3 The Importance of the Enabling Conditions . . . . . . . . . . . . . . . . . . . . . . . 43

Key Findings and Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Looking Ahead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 575.1 Letter of Reference from the Minister of Environment . . . . . . . . . . . . . . . . 575.2 NRTEE Approach to the Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 595.3 Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 605.4 Research Commissioned by the NRTEE in Support of the Reference . . . . 625.5 Key Attributes of the Energy Economy Model – CIMS . . . . . . . . . . . . . . . 635.6 Messages from Regional Meetings Across Canada . . . . . . . . . . . . . . . . . . . . 675.7 Meeting Participants – NRTEE’s Research on

Clean Air and Climate Change - 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

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Getting to 2050:Canada’s Transitionto a Low-emission

Future

GETTING TO 2050: CANADA’S TRANSITION TO A LOW-EMISSION FUTURE

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Executive Summary

Climate change is upon us. Scientific studies are increasingly confident in the assessmentof the relationship between observed climate warming and impacts on the earth. They areconcluding that a large part of this change is directly related to human sources of greenhousegases (GHG).1 Reducing the GHGemissions we put into the atmosphereis central to contributing to theglobal objective to achieve thestabilization of GHG concentrationsin the atmosphere at a level thatwould prevent dangerous climatechange.2

Reducing our own GHGemissions means that Canada isfacing a transition to a low emissionssociety – a transition that will bedriven by environmental, economic and social factors. We have a substantial national interestin understanding and anticipating the nature and scope of that change and in proactively seekingto manage our response, with respect to both mitigation and adaptation measures, in a waythat benefits Canada. This Advisory Report addresses the issue of how to mitigate potentialeffects of climate change, through deep emission reductions. The National Round Table onthe Environment and the Economy (NRTEE) is also working on the issue of adaptation toclimate change and will report on this research in 2008.

The Transition to 2050

In the fall of 2006, the Government of Canada asked the NRTEE to look at the issues ofnational long-term climate change and air pollution policies. Specifically, the NRTEE was askedto provide advice on how Canada could significantly reduce its GHG and air pollutant emissionsby 2050. This Reference enabled the NRTEE to build upon its current long-term climate changeagenda, in which we had previously assessed a technology scenario for a low-GHG future in2050. It allowed us to explore the economic and environmental implications associated withsuch a low-emission future, as well as to start an evaluation of potential policies that may allowCanada to attain its long-term commitments.

“The story the NRTEE has to tell is

one of transition at many levels –

transition in policy, transition in

technology, transition in economy,

and transition in society.”

1. The Intergovernmental Panel on Climate Change (IPCC) states that global warming "is unlikely to be entirely natural in origin" and"the balance of evidence suggests a discernible human influence of the global climate." Working Group III contribution to theIntergovernmental Panel on Climate Change Fourth Assessment Report. Climate Change 2007: Mitigation of Climate Change.

2. United Nations, United Nations Framework Convention on Climate Change. New York: United Nations, 1992, accessed fromhttp://unfccc.int/resource/docs/convkp/conveng.pdf, June, 2005.


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The story the NRTEE has to tell is one of transition at many levels – transition in policy,transition in technology, transition in economy, and transition in society. It is a nationaltransformation within the larger context of global change that is to come. Our advice provides aframework through which governments in Canada can seek to manage the necessary change in away that maximizes economic and environmental benefits for the country.

The federal government – through its Turning the Corner policy statement – has committedto deep long-term emission reduction targets for GHGs and air pollutants. For GHGs, thesetargets are 20% below 2006 levels by 2020, and 60% to 70% below 2006 levels by 2050.Tackling this challenge will require embarking upon a focused and deliberate transition to alow-emission society. The NRTEE research and conclusions show that, with consideration forsome key enabling conditions and acknowledgement of certain risks and uncertainties, thistransition is manageable, and may even provide some unique opportunities.

Three core assumptions guided our approach:

• First, the overarching objective of our climate change policy should be to contribute tothe global goal of climate stabilization;

• Second, Canada’s medium- and long-term emission reduction targets have been defined;and

• Third, Canada has national economic and environmental circumstances that need to be takeninto account in the design and implementation of its climate change and clean air policies.

Enabling Conditions for Managing the Transition

The NRTEE’s research is premised on the federal government’s commitment to achieve deep,long-term GHG emission reductions. We acknowledge that achieving these deep reductions posesreal challenges given Canada’s economic circumstances. But we also recognize that this challengecreates opportunities in terms of innovation and technology development.

It is in Canada’s national interest to begin the transition to a low-emission future immediately.This Advisory Report concludes that the government’s medium- and long-term targets are achievable.We also conclude that delaying action to reduce GHG emissions comes with economic andenvironmental risks. One such risk is that, in the absence of a long-term climate change policyframework, energy infrastructure choices being made now will be increasingly difficult and costlyto address in the future. On the environmental side, the main risk involves higher cumulativeGHG emissions over the time period in question.


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To minimize these risks and ensure we achieve our long-term targets, the NRTEE sees the needfor five enabling conditions that should be reflected in Canada’s climate change policy framework:

1. Canada will have to work in concert with the world.This will ensure that the adverse economic consequences of policy action – particularly inrelation to the competitiveness of our exporting industries and major trading partners –are minimized.

2. Policy certainty – beyond the short term – is central.Our analysis points to the need for a transition in policy from a short-term approach to amedium- and long-term focus in order to create the long-term predictability required fornew investment in innovation and technology.

3. An economy-wide emission price signal, implemented with complementary measures, is the coreelement of a policy framework.The most effective and efficient policy that would result in deep GHG emission reductions isa market-based policy, such as an emissions tax, a cap-and-trade system, or a combination ofthe two. This core policy then needs to be complemented by other regulatory policies, toforce emission reductions from parts of the economy that do not respond to a price policy.

4. Technology deployment will be imperative.Our analysis shows that existing and near-term technologies are sufficient to meet ouremission reduction targets, but all possible low-emission technologies will need to bewidely deployed. These point to the need for development and implementation of otherspecific policies to facilitate and accelerate technology deployment.

5. An integrated approach to climate change and air pollution should be pursued.Substantial benefits can result from a policy framework in which climate change and cleanair measures are designed and implemented concurrently, as many sources of GHGs alsoproduce air pollutants.

A critical point that the NRTEE would like to make, that falls not in the category of enablingconditions but in the category of absolute requirements for Canada moving forward, is that attentionmust be given to implementation of any policy measures considered and put in place. The meredevelopment of a policy framework for climate change should not be confused with itsimplementation by government, industry, capital markets, and at the consumer level.

Recommendations

Drawing from the findings and conclusions contained in this report, the NRTEE makes thefollowing recommendations to the federal government:


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GHG Emissions

1. Implement a strong, clear, consistent and certain GHG emission price signal across the entireCanadian economy as soon as possible in order to successfully shift Canada to a lower GHGemissions pathway, achieve the targeted reductions for 2020 and 2050, avoid higher emissionprices that a delay would entail, and reduce cumulative emissions released to the atmosphere.

2. Institute a market-based policy that takes the form of an emission tax or a cap-and-tradesystem or a combination of the two.

3. Develop complementary regulatory policies, in conjunction with the emission price signal, toaddress sectors of the Canadian economy that do not respond effectively to such a price signal orwhere market failures exist. Complementary policies should also provide support for research,development and demonstration of technologies, as well as strategic investments in infrastructure.

4. Establish a Canada-wide plan, in the earliest possible time frame, that leads to bettercoordination of complementary federal, provincial and territorial GHG emissionreduction policies aimed at common or shared targets, time frames and actions.

5. Apply GHG emission reduction policies that incorporate adaptive management practicesand have built-in monitoring and assessment mechanisms to allow for regular reviews toensure efficiency and effectiveness. This approach will ensure that progress is monitored,compliance issues are addressed, and policies are adjusted to match the required level ofabatement effort, and will minimize and mitigate unanticipated adverse outcomes.

Air Pollutants

• Address GHG emission and air pollutant reductions concurrently to ensure maximumhealth benefits to Canadians and greater economic certainty for industry, by designingand implementing co-pollutant reduction policies in an integrated manner.

For Both GHG and Air Pollutants

• Implement, immediately, the development and design of market-based policy instruments,plus complementary policies, for Canadian environmental objectives, economic circumstancesand technology needs, following broad consultation with industry, environmental andother stakeholders, experts, and all other levels of government, drawing upon international,national, regional and local knowledge and experiences.


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Looking Ahead

In order to better understand how to minimize the risks associated with the transition to a lowemission society, we suggest that additional policy research be conducted. These issues include:

• further analysis of data gaps and modelling;

• policy design issues on our proposed market-based instruments;

• a “bottom-up” analysis of sectoral and regional implications of policy design;

• governance issues related to federal-provincial-territorial coordination of climate changepolicies, linkages to international frameworks and approaches; and

• consideration of potential benefits of addressing climate change.

Introduction


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Introduction

1.1 Purpose

The overall purpose of this Advisory Report is to respond to a request for advice from thefederal government to the National Round Table on the Environment and the Economy(NRTEE), in November 2006, on the question of how deep long-term reductions in greenhousegas (GHG) emissions and air pollutants could be achieved. Specifically, this report focuses onthe policy options available to Canada to address these issues and on the economic and environmentalimplications of those options. This report builds upon the findings and research presented in theNRTEE’s Interim Report to the Minister of the Environment in June 2007.3

A second purpose of this report is to inform the current national debate on climate changeas it relates specifically to medium- and long-term GHG and air pollutant emission reductionstrategies. Over the past five years, the NRTEE has been examining questions related to the useof fiscal policy to promote long-term GHG emissions reductions, climate change adaptation inthe Canadian context, and a long-term technology scenario for how Canada might substantiallyreduce its GHG emissions. This Advisory Report builds on our recent work, adding to thedebate a new view on the design of longer-term climate change policy.

1.1.1 Clean Air Act Reference and NRTEE’s Advice

In October 2006, the federal government introduced Canada’s Clean Air Act to Parliamentalong with the Notice of Intent to Develop and Implement Regulations and Other Measures to ReduceAir Emissions. The Act and the Notice set out the government’s proposed plan to develop short-termregulations for GHG and air pollutant emission reductions in the industrial sectors and to a lesserextent in other areas of the economy. Section 10 of the Notice identified a role for the NRTEE,which was reiterated and enhanced through a Letter of Reference from the Minister of theEnvironment to the NRTEE in November 2006 (see Appendix 5.1).

On GHG emissions reductions, the Reference was specific in its request for advice on:

• Medium-term emissions reduction targets for 2020–2025 for GHG emissionreductions for a number of specified industry sectors;

• A long-term (2050) national emissions target that should be adopted within therange for a 45% to 65% reduction from 2003 levels; and

• Scenarios for achieving such a target.

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3. http://www.nrtee-trnee.ca/eng/publications/ecc-interim-report/section1-ecc-interim-report-eng.html


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On air pollutants, the Reference requested advice on long-term (2050) national emissionreduction targets for sulphur dioxide (SOX), nitrogen oxide (NOX), volatile organic compounds(VOCs), and particulate matter (PM), for a number of specified industrial sectors.

Recognizing that the Reference asked the NRTEE for a broad spectrum of policy advice, thisAdvisory Report responds to those elements of the Reference for which the NRTEE is positioned toprovide credible and informed insight. We therefore focus our advice on the following:

For taking action on GHG emission reductions:

• Scenarios for achieving deep emission reduction targets;

• Policy options for the attainment of deep emission reduction targets; and

• Environmental and economic cost implications of attaining medium- (2020) and long-term(2050) emissions reduction targets, including national, regional and sectoral effects.

For taking action on air pollutant emission reductions:

• Economic costs associated with significant emission reduction targets for NOX, SOX,VOCs and PM;

• Sectoral and regional implications of 50% emission reductions of these air pollutants; and

• An integrated approach to policy that addresses both GHG and air pollutant emissionsconcurrently.

The NRTEE was also asked to provide advice on national ambient air quality objectives.We have responded to this request by providing advice on process considerations whendesigning and setting ambient air objectives, rather than on the actual ambient targets them-selves. The NRTEE believes it is not in a position to pronounce on such targets. Our adviceon process considerations for setting national ambient air quality objectives will be providedunder a separate cover.

It is important to note that this report reflects economic analysis conducted on the costsassociated with various GHG and air pollutant emission reduction targets. It does not, how-ever, provide any detailed analysis of the benefits – economic, environmental or social – thatmight accrue from such reductions. Nor is the NRTEE in a position to comment on whatthe costs of inaction might be if such targets are not achieved. These are very important areasfor future consideration and are required if we are to better understand the full extent ofboth the costs and the benefits of globally moving to a lower GHG emission future.


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1.1.2 Federal Regulatory Framework and NRTEE’s Reference

In the time since the NRTEE was asked to provide its advice on long-term GHG and airpollutant reduction policy, the Government of Canada released in April 2007 its Turning theCorner Plan and the Regulatory Framework for Air Emissions. This policy document commitsCanada to very specific short-term action to achieve reductions of both air pollutant andGHG emissions. The Framework also commits the federal government to medium- and long-term GHG emission reduction targets of 20% below 2006 levels by 2020, and by 60% to70% below 2006 levels by 2050. While the Framework identified short-term actions toachieve emission reductions prior to 2020, it did not specify policies or directions other thanthe emissions reduction targets after that date.

It is this distinction between short-term regulatory action and thinking about effectiveclimate change policy for the medium and longer term that sets the NRTEE’s work apartfrom the Regulatory Framework. In this Advisory Report, we focus exclusively on how medium-and longer-term reduction targets might be achieved and the possible environmental andeconomic implications of attainment. We do not, therefore, comment in this document onthe likely success of the current Regulatory Framework, or evaluate it in any way, but insteadadvise how climate change and air pollutant policy might transition to a longer-term view.

1.1.3 Conceptual Framework

In order to think about this problem of designing policy to attain longer-term emissionreductions, the NRTEE conceptualized our advice as four distinct, though related, elements– emission reduction objectives, targets, pathways and policies:

• Objectives are essentially those outcomes that Canada is trying to achieve as a nation.For GHGs they can be expressed as long-term global concentrations of carbon dioxide(CO2) in the atmosphere that are set based on an understanding of how emissionsultimately adversely impact sensitive climate, ecosystem and human receptors.Canada’s climate change policy (or GHG emission reduction) objective, therefore,could be Canada’s share of global emissions that stabilize atmospheric concentrationsof CO2 at a level that avoids dangerous climate change.4 For air pollutants, the overallobjective is to have clean air. Objectives, while set at a national level, are bestexpressed as regional and local ambient air quality objectives that will have a directand real effect on the health of Canadians and ecosystems.

4. The United Nations Framework Convention on Climate Change provides some guidance about the form of an appropriatelong-term objective “to achieve the stabilization of GHG concentrations in the atmosphere at a level that would prevent dangerousanthropogenic interference with the climate system.” United Nations, United Nations Framework Convention on Climate Change.New York: United Nations, 1992.


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• Targets are the emission reductions that contribute to the attainment of the objectives.These targets can differ in timing and stringency (or the level of abatement effortrequired to attain the target).

• Pathways (or scenarios) are the preferred trajectories of emission reductions thatachieve the national emission reduction targets while maximizing environmentalbenefits and minimizing economic costs and dislocations.

• Policies that achieve the preferred pathway are then based on a careful consideration of arange of policy effectiveness criteria. The selection of policy instruments largely involvesconsideration of these criteria including breadth of coverage, environmental effectiveness,economic efficiency, political and stakeholder acceptability, and administrative feasibility.

We use these four elements as the basis for organizing and delivering our advice. Thenext section provides important context that has influenced our GHG advice specifically.

1.2 Important Context and Assumptions of the NRTEE’sGreenhouse Gas Advice

The NRTEE understands and acknowledges that the development of Canada’s long-termpolicy response to climate change will not proceed in a vacuum. A number of key considerations –both domestic and international – will influence our national approach. These considerations formthe basis for assumptions that the NRTEE views as either existing or necessary to understandhow Canada can and should develop policies to achieve deep long-term GHG emission reductions.

We believe it is important to be explicit about what our key assumptions have beenthroughout our work, because these have an impact on both the scope and nature of ouranalysis and recommendations. We view the following assumptions as either current (as theyarise from current government policy or commitment) or necessary (as they are explicit inour analysis and therefore necessary to framing our recommendations).

Assumption #1: Climate stabilization is the objective

Canada, like every other country in the world, needs to place its domestic efforts on climatechange in an international context. Therefore, the overall objective of Canada’s climate change policyframework needs to be calibrated to a global objective. The United Nations Framework Conventionon Climate Change (UNFCCC) sets as a global objective “to achieve the stabilization of GHGconcentrations in the atmosphere at a level that would prevent dangerous anthropogenic interferencein the climate system.” The Intergovernmental Panel on Climate Change (IPCC) has laid out anumber of scenarios linking global average temperature increases to atmospheric GHG concentrations.


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Although the NRTEE has stated in the past that a 2°C global average increase would constitute a“dangerous” level of climate change for Canada5 (since a global average increase would translate intohigher average temperature increases for Canada, given its northern location), we are not in a positionto offer advice on the atmospheric concentration objective to which Canada should be committing.However, what is clear to the NRTEE is that Canada – as a signatory and ratifier – is committed tothe overall objective of the UNFCCC, and so is committed to contributing to climate stabilization aspart of global efforts on this issue.

Assumption #2: Medium- and long-term goals have been defined

The Government of Canada, through its 2007 Turning the Corner plan and associated regulatoryframework, has defined medium- and long-term GHG emission reduction targets for the country.To reiterate, the current commitment is a 20% reduction in GHG emissions (relative to 2006levels) by 2020, and a 60% to 70% reduction (relative to 2006) by 2050. This is the first time afederal government has set forth such long-term GHG reduction targets for Canada.

And so, although we were asked to provide advice on targets for Canada in the originalReference from which this report emanates, there has been – in the time that we have beenconducting this work – a commitment by Canada regarding both medium- and long-termGHG emission reduction targets.

Assumption #3: Canada has certain unique national circumstances

Most countries can point to national circumstances that have a bearing on their policyresponse for climate change. Canada is certainly justified in claiming that its own circumstancesframe the choices for its own policy framework. The NRTEE has assumed these circumstances aspart of its own conclusions and recommendations. These circumstances affect the choice ofthe most effective, realistic and sensible pathway to achieving deep GHG emission reduc-tions, while ensuring ongoing economic growth and prosperity.

Among the most significant of these are:

• the fact that Canada, as a northern nation with a long coastline and continent-sizedlandmass, will be among the most impacted countries in the world;

• the fact that Canada’s population will continue to grow during the period reviewedin our analysis, a fact not universal to the Western industrialized economies; and

5. National Round Table on the Environment and the Economy, 2005, “Advice to the Prime Minister in Advance of COP 11.”Ottawa: NRTEE.


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• the fact that Canada will likely continue to be a net energy exporter during the periodreviewed in our analysis.

The latter two points imply that Canada’s emissions will continue to grow at levels thatare likely higher than other industrialized nations, and so abatement effort will work from ahigher base. However, a final national circumstance that Canada is fortunate to have shouldalso be considered – that is the fact that we are one of the wealthiest countries in the world,and are therefore better positioned to bear the costs and risks of GHG and air pollutantemission reduction policies.

1.3 Transition to 2050

The inescapable effects of climate change and air pollution over the next several decadesrequire Canada to embark upon a focused transition to a low-emission society. As we do so, adominant feature in the global,national and regional economieswill be a constraint on GHGand air pollutant emissions. Thisconstraint will necessitate significantchanges to energy systems – bothin terms of energy production andconsumption, as well as the way inwhich Canadians work and livetheir lives. The issues of climatechange and air pollution will clearlypresent challenges to Canadians,in terms of our ability to mitigatepotential effects, as well as to adaptto changing conditions.

A central question for Canadians, therefore, is, “How can we, as a nation, ensure that thetransition to a low-emission future is done in a sustainable manner?”

As a starting point, while recognizing the need to implement policies now to start us on theemission reduction pathway, we need to equally focus our attention on designing and implementingpolicies for the medium and longer term. Defining our future direction now is important sinceit will influence many capital stock and infrastructure investment decisions made over the nextdecade that will determine whether Canada can effectively and efficiently move to a low-emission(GHG and air pollutant) pathway in the longer term. In this respect, emission reduction policiesare also investment-driving policies. Indeed, the policy choices we make now will determine ourability to achieve deep reductions later.

A central question for Canadians,

therefore, is, “How can we, as a

nation, ensure that the transition to

a low-emission future is done in a

sustainable manner?”


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And if we transition successfully to this low-emission future, what would Canada look like in2050? Recognizing that there is uncertainty about what the future holds, recent NRTEE research6

illustrates one possible scenario, including, but not limited to some of the following observations:

• Personal use of energy has changed significantly. For example, housing densities haveincreased to the point where 70% of Canadians live in some form of multipledwelling, and personal vehicles and homes are much more energy efficient.

• Energy demand and use will continue to rise but energy systems will have transformed.7

For example, electricity is made by a much more diverse and widely distributed set ofgenerators, including an expanded role for renewables; however, Canada continues torely heavily on its hydroelectric resources. Where coal is still used to produce electricity,CO2 capture and sequestration has been designed into the plants and where possible,this captured CO2 is used to enhance oil recovery. Existing nuclear plants are replaced,with additional capacity added in Ontario.

• Freight distribution has not changed dramatically since 2000. The efficiency of thetrucks used to move freight has doubled or tripled over the past four decades and onaverage biodiesel now provides about 20% of the energy required for the sector.

• The industrial structure in Canada has continued its gradual shift to services and hightechnology manufacturing, leading to improved energy efficiency across the economy.

This transition need not be forbidding or overwhelming to Canadians. Think back totechnological changes in the past 20 to 30 years alone that have changed the way we live andwork, but for which we now take for granted – from computers to cellular phones to theInternet in our homes and offices. We have not only adjusted to these major transformations,we have embraced them throughout our society.

The next section explores how we might manage this transition.

6. National Round Table on the Environment and the Economy, 2006, “Advice on a Long-term Strategy on Energy and Climate Change.”Ottawa: NRTEE.

7. The International Energy Agency’s “World Energy Outlook 2006” reports that by 2030 global energy demand could increase in theorder of 40% to 50%. This report looked at a “world alternative policy scenario” that concluded that there will need to be a deploymentof a mix of energy technologies including improved energy efficiency, carbon capture and storage, renewables and – where acceptable –nuclear energy. IEA, 2006.

Managing theTransition to aLow-emission

Future


11

Managing the Transition to a Low-emission Future

2.1 Enabling Conditions for Managing the Transition

The Government of Canada has announced a set of long-term emission reduction targetsfor GHGs and air pollutants. If this low-emission vision for the future is to be achieved, Canadawill need to embark on a transition of significant proportions to lower our GHG and air pollutantemissions. As Canada transforms, costs will emerge from the need for large-scale investments inlow-emission technologies. The avoidance of future damage from both dangerous climatechange and poor air quality will be the related benefits. At the same time, the challenge ofattaining this vision poses an important opportunity with respect to innovation and technologicaldevelopment. In addressing this vision for Canada, the shared environmental objective is cleanerair and climate stabilization below levels that are considered “dangerous”; the shared economicobjective is sustainable growth, prosperity and higher living standards.

To inform the policy debate on how Canada can transition with a view to minimizingeconomic, social and environmental risks, five key enabling conditions are put forth:

• Canada will need to act in concert with the world, where emission targets align withthose of the industrialized world, competitive circumstances are taken into account andglobal emission reduction opportunities are realized.

• Policy certainty – beyond the short term – is central to ensure early and sustainedaction leads to the attainment of both medium-term (2020) and long-term (2050)targets while minimizing economic costs.

• Strong, consistent and economy-wide emission pricing is required as soon aspossible if cost-effective emission reductions are to be sustained to mid-century andlikely beyond.

• Widespread low-carbon technology deployment will be imperative if emissionreductions targets are to be achieved.

• Integrated air pollutant and GHG emission policies are necessary if economic costsand environmental risks are to be minimized.

2


12

Even with the adoption of these enabling conditions there are still important economic risksand other uncertainties associated with the transition:

• Effects on national economic growth are important, but not significant over time,with the impacts of transition differing in time but ultimately being small relative to thetotal size of the economy.

• Regional, northern and sectoral outcomes will not be uniform and will need to bemanaged to mitigate disproportionate impacts on regions, sectors and consumers.

Deviation from these enabling conditions will increase the environmental and economicrisks identified in this report, especially if an integrated climate change policy is not followed.

2.1.1 A Note on Our Modelling, Assumptions and Caveats

In assembling information to supplement our knowledge and inform our advice, we relied onthe CIMS model, an integrated, energy-economy equilibrium model.8 The CIMS model was usedto identify technically feasible and cost-effective abatement opportunities for the medium-term(2020) and long-term targets (2050). CIMS was selected since it simulates the evolution of theenergy-using capital stock for 2000 to 2050 across the entire Canadian energy economy underbusiness-as-usual and emission-reduction change scenarios. This modelling construct thenallowed us to explore alterative targets and pathways simultaneously to better understand theassociated environmental and economic risks of alternatives.

To conduct this “what if” scenario testing, we applied generic emission “prices” in CIMS, whichsent a price signal that carbon will be more expensive in the future. The price signal is similar to anemissions tax and/or an emissions cap-and-permit trading scheme, in that both of these instrumentscan lead to cost-effective emission reductions. The emissions price signal changes the relative cost offuel and technologies so that a low-carbon technology is deployed and consumer behaviour changesat a level sufficient to achieve the desired emission reduction. Since all in the economy face the sameemissions price signal, costs are equalized so that only the lowest cost emissions reductions are selected.In practice this does not always occur but, for setting targets and exploring pathways, it is anappropriate way to conceptualize and model the issue. The emissions price pathways that aremodelled therefore indicate the strength of a market-based price required to achieve a given level ofemissions reduction. Policy design options, that is, how to send the price signal to achieve cost-effective emission reductions, is then another question that we explored with the model.

8. See Section 5.5 for an explanation of the key attributes and assumptions in CIMS.


13

The GHG emissions reductions modelled in CIMS can be realized through energy efficiency,fuel switching, carbon capture and storage (CCS) and overall demand reduction. Similarly,the air pollutant emission reductions can be achieved though these actions, as well asthrough tailpipe controls. The full technical report, with additional modelling details, isavailable upon request.9

Because CIMS is an energy-economy model, the scope of the NRTEE analysis is limitedto “energy-related” GHG and air pollutant emissions. These include the emissions of GHGs(primarily CO2, but also methane and nitrous oxide) that result from the production andconsumption of fossil fuels. Approximately 80% of GHG emissions in Canada are covered byour analysis. The remaining non-energy GHG emissions are beyond the scope of this study.For NOX, SOX, PM and VOCs, CIMS covers nearly all emissions in Canada except thosefrom open sources (like forest fires, soils and dust from roads).

Finally, an important caveat – the inherent uncertainty that underpins long-term modellingsuch as this work. We are forecasting a number of factors in the long term and thus there areuncertainties. What follows, therefore, are not predictions of the specific price of carbonnecessary to attain deep reductions. Rather, it is advice on important economic and environmentalpolicy fundamentals for long-term air and climate change policy for Canada.

The following sections explore the enabling conditions presented in the previous section.

2.1.2 Canada Acting in Concert with the World

An important enabling condition to minimize both the environmental and economic risksassociated with deep emission reductions, and climate change more generally, is that Canada actin concert with the rest of the world in terms of both domestic emission reduction efforts andaccess to potentially lower-cost international emission reductions. This is particularly relevant asthe world considers a post-2012 approach.

With respect to environmental risk, Canada’s share of global emissions and hence itscontribution to the stock of atmospheric carbon is low, and if action is not taken globally,Canada’s efforts alone could do little to stabilize atmospheric concentrations. But sinceCanada is particularly sensitive to climate change impacts, it is in Canada’s national interest todemonstrate its leadership in emission reductions to ensure that it influences the developmentof an appropriate international emissions reduction regime.

9. Pathways for Long-term Greenhouse Gas and Air Pollutant Emissions Reductions. J&C Nyboer and Associates. July 2007.


14

A second obvious rationale for Canada not acting alone is that it limits any possiblecompetitiveness risks that might emerge from unilateral action. We believe that the most criticalassumption that the NRTEE has made in its work, particularly in our modelling, is that whateverpolicy framework Canada puts into place, it is comparable to its competitors and trade partners,predominantly the United States. While this is a fair assumption for major industrialized tradingpartners, such as Europe and California, which have already made medium- and long-termemission reduction commitments, there is uncertainty with respect to action by the so-calledBRIC countries (Brazil, Russia, India and China). If our major trading partners, particularly theUnited States, do not implement comparable policies within a reasonable time frame, the economicrisk of the deep domestic reductions investigated in this report rises.

At the same time, domestic action by Canada can take advantage of potential linkages topolicy instruments adopted internationally – in particular emissions trading – and so in theorycan reduce the overall costs of achieving deep GHG reductions. The NRTEE views this asparticularly imperative given the deep long-term reductions contemplated and the associatedhigh domestic emission reduction prices that are revealed below.

It is not the NRTEE’s view that any of this should be justification for Canada not takingaction now to either reduce emissions now, or put in place the most effective policy frameworkfor deep, long-term reductions in the future.

2.1.3 Policy Certainty Beyond the Short Term is Central

Targets and PathwaysIn the absence of government interventions, substantial increases in Canada’s GHG emissions

can be expected through 2050, primarily as a result of natural resource development and economicgrowth. GHG emissions in 2020 could be in the order of 65% greater than 1990 levels andaccording to our projections will be more than double 1990 levels by 2050 (Figure 1).

Consistent with the Reference, the NRTEE examined the implications of long-term GHGemissions reductions of 45% to 65%10 (from current levels) by 2050.11 Our examination of theimplications of these targets points to a trade-off between environmental effectiveness andeconomic efficiency. The following section explores these trade-offs.

10. The NRTEE analysis is based on absolute emission reduction targets, not intensity-based targets.11. In this report, all estimates of emissions exclude agricultural land use, waste, solvent, hydrofluorocarbons (HFC) and some other non-

energy emissions and therefore covers ~80% of total Canadian GHG emissions.


15

Figure 1: Comparison of “Business-as-Usual (BAU)” forecasts for GHG emissions(excluding agricultural land use, waste, solvent, HFC and some other non-energyemissions; this covers ~80% of total GHG emissions).

Four GHG emission reduction scenarios were evaluated for two different targets (45% and65%), and two different GHG price path scenarios (“slow” and “fast”)12 (Figure 2). A “slow”start sought a pathway to meet the 2050 target by stabilizing emissions in 2020. A “fast” startalso met the 2050 target, but aimed to reduce emissions in 2020 in the order of 20% below2005 levels. Alternative GHG emissions price trajectories were then revealed by the modellingfor these four pathways (Figure 3).

The primary finding from the NRTEE’s research on these alternative pathways is that reducingGHG emissions by 45% and 65% by 2050 is achievable using current abatement options suchas energy efficiency, fuel switching, renewables and CCS. This finding is consistent with manyother recent studies including one by the NRTEE.13

Notes: CIMS is our forecast. ICF forecast comes from NRTEE, 2006, “Advice on a Long-Term Strategy on Energy and ClimateChange,” Ottawa: NRTEE. Informetrica forecast comes from Informetrica, 2007, “Projection of Total GDP for the Long term.”CEOU forecast comes from Analysis and Modelling Division, 2006, “Canada’s Energy Outlook: The Reference Case 2006,” Ottawa:Natural Resources Canada.

12. In the scenarios modelled here, this is a price that applies throughout the economy and begins immediately. The model did notnecessarily simulate an “optimal” emissions price trajectory; instead, it simulated a GHG price trajectory that is shown by the modelto achieve the given target.

13. National Round Table on the Environment and the Economy, 2006, “Advice on a Long-term Strategy on Energy and ClimateChange.” Ottawa.


16

Figure 2: GHG emissions forecasts in business-as-usual and the alternative prices scenarios(excluding agricultural land use, waste, solvent, HFC and some other non-energyemissions; this covers ~80% of total GHG emissions)

Another important observation is that a strong, economy-wide price signal is required –regardless of pathway – to get at the substantial GHG reductions contemplated for 2050 (Figure3). The modelling suggests that GHG prices in the range of $190 to $240 (in 2003 Canadiandollars) per tonne of carbon dioxide-equivalent (CO2e) are required to attain a reduction of45% from 2005 levels by 2050 if Canada were to meet the target using domestic actions only.These price ranges are similar to GHG emission prices reported in other studies. For example,a study by the IPCC (2007) suggests that GHG prices in the range of US$15 to $130/tonneCO2e are required to attain a global reduction of approximately 20% from 2005 levels by2050.14 Our research is an analysis of much deeper reductions for Canada without internationalemissions trading, which explains our higher emissions prices. That said, they are of a similarmagnitude.

An important caveat is that all emission prices predicted beyond the year 2025 are speculative(greater than $200/tonne); there is no doubt a great deal of uncertainty exists regarding the priceof GHG abatement. At higher carbon prices, there is no way to accurately predict how themarkets will react or how innovation will accelerate in response. These two factors alonecould significantly affect the emission price. Similarly, the domestic emission price will be

14. IPCC, 2007. “Climate Change 2007: Mitigation of Climate Change,” World Meteorological Organization/United NationsEnvironment Program, New York: Cambridge University Press. The IPCC (2007) report does not specify a GHG price required toattain a given emissions reduction; it reports a GHG price required to attain a stabilization in the atmospheric concentration of CO2eat around 550 ppm. The range of emissions reductions required to attain this concentration of CO2e is estimated to be between 0%and 35% from 2005 levels by 2050.


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Risk for target non-attainment

The scenarios in our research illustrate that if GHG emissions are to be reduced by 65%from current levels in 2050, absolute emissions reductions of at least 20% are necessary by2020.15 Furthermore, the research suggests that a delay in action will likely result in not attainingthe 2020 target. This “non-attainment” risk exists because there is a high rate of capital stockturn-over in the period from 2020 to 2025. There is an opportunity now to shift the economyonto a lower emissions path because capital investment decisions for new lower-emissions tech-nologies are already being made today. If we miss this opportunity to deploy lower emittingtechnologies, the economy will most likely become locked into a future emissions path fromwhich reductions to the 65% level will either be extremely costly or simply unattainable. Anearly, strong and certain emission price is therefore a critical enabling condition to influencetechnology choice in capital stock to be replaced between now and 2025.

Higher emissions price

Figure 3 illustrates that for the45% and the 65% targets, the“slow” start requires a significantlyhigher emission price in the latteryears to compensate for the lowprice at the start (which allowsemissions to continue to increase).Conversely, the “fast” start requires ahigher emission price in the med-ium-term (2020), which results in alower emission price over the longterm but results in greater emissionreductions in the earlier period.16

The research concludes that a delay in action in reducing emissions will likely result in theneed for higher emission price to achieve the targets. Since expected future emission prices willinfluence investment decisions now, long-term policy certainty is a key element of a successfultransition strategy. There is, therefore, a need for government to clearly and consistently com-municate that an economy-wide emission price will occur, and will escalate appropriately on ascheduled basis from now to mid-century to allow for planning, investment in new technolo-gies, and sectoral and consumer transition.

15. This analysis did not contemplate a scenario in which a later and more vigorous ramp-up of CCS and nuclear energy might occur post-2020, and whether such a scenario might achieve a 65% reduction target in 2050.

16. Note that the prices shown here are not meant to be exact or prescriptive, but demonstrate trade-offs between early and late actions.

“The scenarios in our research

illustrate that if GHG emissions

are to be reduced by 65% from

current levels in 2050, absolute

emissions reductions of at least

20% are necessary by 2020.”


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Higher cumulative emissions

While annual targets in the medium and long term are important, it is critical to keep inmind that the cumulative emissions between now and 2050 will influence the stock of carbon inthe atmosphere into the next century. Figure 4 illustrates the cumulative GHG emissions fromnow to 2050 in the BAU scenario and each of the four policy scenarios, as well as the cumulativeemission reductions for comparison.

With the BAU scenario, GHG emissions released to the atmosphere are predicted to be inthe order of 40 gigatonnes (Gt). Emission reductions from the BAU are 13 Gt (slow andshallow), 16.5 Gt (slow and deep), 17 Gt (fast and shallow), and 20 Gt (fast and deep). In ourmost aggressive scenario, cumulativeemissions are reduced by about 50%for the entire period to mid-century.Figure 4 also illustrates that themore aggressive scenarios, with“fast” starts, reduce cumulativeGHG emissions significantly morethan the pathways where the start isdelayed. This leads to the conclu-sion that, even though the “fast”and “slow” pathways can bedesigned to reach the same annualtarget, the overall additions to thestock of atmospheric carbon will beless for a fast start relative to a slowstart. This “savings” between now and 2050 are equivalent to about four to five years of theCanadian GHG emissions under the business-as-usual scenario or about 3,500 to 4,000 Mtof CO2e.

In choosing a GHG emission reduction pathway, one should consider not only the annualreduction target, but the potential cumulative emission reductions associated with the pathway.

“This “savings” between now and

2050 are equivalent to about four

to five years of the Canadian GHG

emissions under the business-as-

usual scenario or about 3,500 to

4,000 Mt of CO2e.”


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2.1.4 An Economy-wide Emission Price with Complementary Policies

With the conclusion that an economy-wide signal is needed sooner rather than later and that itneeds to be certain, the question then becomes how to send such a broad and strong signal. Whilevoluntary programs, information programs, subsidies and targeted regulations may result in someemission reductions, they simply cannot deliver the deep 65% reductions currently contemplatedfor Canada. Therefore, the NRTEE concludes that an economy-wide emission price policy willneed to be the main policy lever.17 This price policy will not be fully effective on its own, and thuscomplementary policies will also be needed. This leads the NRTEE to observe that in order tosuccessfully transition, Canada will need to:

1. Implement a strong, consistent long-term emission price signal across the entire Canadianeconomy. Applying the emission price broadly ensures an equitable distribution of costwhile seeking reductions from all segments of the economy; and

2. Complement emission pricing with targeted measures. These could include regulations,strategic investments in infrastructure, and support for research, development and demon-stration programs that address areas where the price signal is less effective. To a lesser extent

17. National Round Table on the Environment and the Economy, 2005. “Economic Instruments for Long-term Reductions inEnergy-based Carbon Emissions.” A key finding of this research was that the use of economic instruments, such as tax measuresand tradable permits, was the most effective and efficient means of achieving long-term GHG emission reductions.

Figure 4: Cumulative emissions and reductions in the BAU and the alternative GHGpathways, 2006 to 2050 (excluding agricultural land use, waste, solvent, HFC andsome other non-energy emissions; this covers ~80% of total GHG emissions).


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information programs will be required to educate Canadians and build support so thatindividuals will take action on climate change.

There is a critical need to instill confidence in the policy direction over the long term by clearlyand consistently communicating these policies of economy-wide emission pricing and targetedmeasures. An early and clear pricesignal is needed in order to influencethe investment, production and con-sumption decisions of industry andconsumers today that will shiftCanada onto a pathway to reduceGHG emissions over the long term.This is strongly linked with the issueof capital stock turnover within theentire economy. As discussed above,decisions are being made today thatwill determine the technology andcapital stock that will persist in theCanadian economy for the long term.Many of these decisions subsequentlyaffect the level of released emissions.If investors and business leaders areconfident in the future policy direction of governments, then they will be able to make better-informed decisions regarding their capital stock and technology choices and can cost themaccordingly. Therefore, policy certainty regarding the future regulatory regime is central to asuccessful transition.

Choosing an Appropriate Emission Price Policy

The choice of the preferred emission price policy involves considering either a tax on emissions,18

a cap-and-trade system19 or a combination of the two. A GHG emissions tax imposes a price on eachunit of CO2e emitted by a source, whereas a cap-and-trade system is a regulatory program underwhich government sets a limit on the volume of GHG emissions, distributes permits for allowableemissions and enables firms to buy and sell the permits after the initial distribution. Both options aremarket-based in that they transfer abatement decisions to emitters, and both will signal that GHGemissions have a monetary value, stimulating actions that will lead to emission reductions.

18. We use “tax” in this report; however, this could also be referred to as a levy or a charge since we have not defined what the “tax” wouldinvolve with respect to recycling considerations.

19. Also referred to as “emissions trading program” or other related nomenclature.

“An early and clear price signal is

needed in order to influence the

investment, production and

consumption decisions of industry

and consumers today that will shift

Canada onto a pathway to reduce

GHG emissions over the long term.”


23

cap-and-trade scheme, does not provide certainty in meeting a given emissions reduction target,because emitters have flexibility to pay the tax or to reduce emissions. As a result, it will likely benecessary to adjust the level of the tax over time to meet a given emission target. It does, however,provide price certainty where the tax level ensures the cost burden is known and fixed in advance ofthe policy.

The impact of the tax on energy exporters would not be clear-cut and would depend on theirability to pass on the carbon cost of producing the energy exported to international energy markets.They would not, however, be taxed on the embodied carbon in the exports.

Since all domestic fossil fuel would be taxed based on its carbon content or actual emissions, asignificant amount of revenue would be raised in addition to the abatement effort undertaken. Therewould be a need for government to consider how to recycle revenue back to emitters, including firmsand households. There are many forms that recycling could take, including compensating adverselyimpacted firms and segments of society,21 proportionally returning revenue based on tax paid,reducing other labour or capital taxes, or investing in technology and innovation.

While the NRTEE is not proposing a particular emission tax design, we are aware of the verysensitive issues associated with developing and instituting a new tax such as this. Our early take onthe principles associated with an emissions tax include:

• ensuring it is applied economy-wide for maximum efficiency and to keep the price aslow as possible;

• having a recycling component so the revenue is returned to the regions, sector andconsumers that pay it;

• linking, in the first instance, the revenue to specific technology development andapplication aimed at GHG emission reductions;

• computing, accounting and auditing the revenue and its distribution in a fully transparentmanner; and

• considering the benefits of broader-based tax relief for taxpayers as part of this tax-shiftingeffort.

2. Downstream cap-and-trade system

A downstream emission cap-and-trade (DCT) system sets an aggregate cap on emissions fromlarge industrial emitters. In this system, the total number of permits allocated to emitters is equalto the overall cap on emissions. At the end of each year, all firms must remit one permit to thegovernment for each tonne of CO2 emitted during the year (or each tonne of embodied CO2 in


24

purchased fuels, depending how emissions are measured). Permits can be traded from one emitter toanother, which should result in cost-effective emissions reductions provided transaction costs are notprohibitively high and the permit market functions well.

The DCT system modelled by the NRTEE differs from the current federal government plan ina number of ways. First, the NRTEE scenario sets an absolute cap on emissions, whereas thegovernment plan involves an intensity-based system.22 Second, the NRTEE scenario also differsfrom the federal plan in that it does not consider credits for early action, international offset creditsor credits for investments in technology.

A DCT system would be applied most effectively to a subset of large emitters because of thedifficulty in monitoring emissions from small sources, as well as the potential transaction costsinvolved with emissions trading from small sources. The federal government has been in the processof developing a DCT with approximately 700 large industrial firms (known as the large final emittersor LFE), representing close to half of total Canadian emissions. Unlike the scenario we assessed, thesystem currently under development by the government is intensity-based because it reduces theemissions per unit output of the large final emitters but does not cap overall emissions, which cangrow with increasing economic output.

Because the DCT system only covers about half of Canada’s energy-based emissions, we addedtwo other policies in our scenarios and modelled these also: domestic offsets and carbon tax. Thiswas done in an attempt to send a comprehensive price signal that would reduce GHG emissions insectors not covered under the cap. Carbon offsets would enable individuals and businesses to reducethe CO2 emissions they are responsible for by paying for GHG reductions in another place, typicallywhere it is more economical to do so. Carbon offsets typically include renewable energy, energyefficiency and reforestation projects. Because these subsidy-type programs are never as effective, weaccount for the failure rates in our estimates. A second case – a broadly applied emission tax – wasalso assessed as a complement to the DCT. Because the industrial emitters are covered by theemission price under cap and trade, the tax would need to be designed to provide exceptions, suchas tax rebates, for emissions covered by the DCT.

3. Upstream cap-and-trade system

Under an upstream cap-and-trade system (UCT), the government sets an aggregate cap on theamount of carbon content in the fossil fuel that can be sold by Canadian energy producers andimporters, and allocates tradable permits to all entities covered by the program. The trading schemewould be imposed at the “upstream” points of fossil fuel production, at the level of the oil refinery,natural gas plant, and coal mine mouth (as well as directly on energy importers). The governmentissues permits equal to the total level of emissions allowed by the cap. Participating firms can then

22. The DCT assessed in this report also differs from the federal government’s DCT in that we set an absolute cap on emissions, and thenadded broad offsets and a carbon tax to the DCT.


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economy’s emissions, while the broad offsets system is ineffective because it provides incentives totechnology and behaviour that would likely have occurred in the absence of the offsets system(i.e.,“free-riders”). While offsets seem to be a feasible short-term strategy, their use in the longerterm does not align with our observation that an economy-wide price signal is necessary to ensurea successful transition.

If the NRTEE’s broad projections for the DCT system prove to be the case, Canada willalso need a policy signal that is broader in scope, more stringent and administratively simpler. Inthat event, options include adding a carbon tax for uncovered sectors to the downstream tradingsystem, or moving to an economy-wide tax or an upstream trading regime. If the DCT werecomplemented with a carbon tax (CTax) on the remaining sectors not covered by the DCT, theeffectiveness could be expected to increase substantially (see Figure 5). The research shows thatthe complementary tax decreased emissions threefold. Similarly, the UCT and economy-wideemission tax (Upstream Tax) will be more effective than a downstream system with broad offsetsbut on par with the DCT plus CTax.

Figure 5: GHG reduction paths of the market-based policy options (excluding agriculturalland use, waste, solvent, HFC and some other non-energy emissions; this covers~80% of total GHG emissions)

Note: DCT is downstream cap-and-trade, UCT is upstream cap-and-trade, DCT with CTax includes complementary carbon tax on remainingemissions. Offsets is a system of broad economy-wide emission reductions for sectors not covered by downstream cap-and-trade systems.


27

These results lead to one core conclusion: broadly applied carbon price polices – starting with amodest price signal that will predictably escalate over time – all have the potential to deliver cost-effective and deep emission reductions. There is no single-best carbon price policy if applied broadlyand consistently. Selection of the appropriate market-based policy will require trade-offs betweencompeting policy evaluation criteria; no one policy design is optimal in terms of all criteria based onthe research we have conducted.

This leads to the key point, mentioned previously, that policy design matters. More detailedanalysis and, perhaps more importantly, a focused dialogue with industry, the public and otherstakeholders is needed before any emission price policy option is either abandoned or embraced.While there are many critical design considerations, an important aspect of the policy design will bethe consideration of potential compliance mechanisms, particularly as they relate to industry andother stakeholders who will be required to meet mandatory GHG emission reductions.

Complementary Policies

While the broad price signal policies (i.e., tax or cap-and-trade) would form the core of anemissions reduction policy package, other complementary policies will be required to addresshard-to-get-at emissions. Our research shows that, while most of the options result in significantemission reductions, these will not fully attain the defined target of 65%. As a result, there will be aneed for complementary policies to attain further emission reductions by 2050; specifically regulatorymechanisms that will force GHG emission reductions from parts of the economy that may notrespond to a price signal. These gaps arise through the following:

• market failures and other barriers that reduce the responsiveness of certain sectors tochanges in emission costs – particularly in the transportation and building sectors andsome consumer markets such as vehicles, houses and appliances; and

• emissions from sectors of the economy not covered by the broad price signal, includingagriculture, forestry, waste and portions of the upstream oil and gas extraction system(such as fugitive emissions of methane from oil and gas wells and coal mines, and gasleaks from pipelines).

The complementary policy toolkit includes policies such as regulatory standards, subsidies andinfrastructure investments. To assess the effectiveness of possible complementary policies, a series ofregulations in the building and transportation sectors were combined with the market-basedoptions. The resulting GHG emission reduction pathways are shown in Figure 6.


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Figure 6: GHG reduction paths of the market-based policy options withcomplementary regulatory policies (excluding agricultural land use, waste,solvent, HFC and some other non-energy emissions; this covers ~80% of totalGHG emissions)

Figure 6 shows that more reductions occur when targeted regulations complement broadlyapplied carbon prices, with building regulations (BR) and transport regulations (TR) increasing theeffectiveness of all policies. Importantly, the addition of building and transportation regulationsresults in significantly more reductions when added to the DCT-plus-Offsets package (resulting inapproximately 600 Mt further reductions in 2050) and when added to any one of the UCT,upstream tax or DCT plus tax (resulting in approximately 90 Mt additional reductions).

This shows that regulatory policies can be very effective in closing gaps between actual emissionsand targets when some segments of the economy are insensitive to emission prices.23 This gapcould be closed further through international purchases of emission permits, provided the inter-national price was below the cost of domestic reductions and real reductions could be assured.

Note: DCT is downstream cap-and-trade, UCT is upstream cap-and-trade, DCT with carbon tax includes complementary carbon tax onremaining emissions. BR is building and equipment regulations. TR is transport (freight and passenger) regulations. Offsets is a system ofbroad offsets for sectors not covered by the downstream cap-and-trade system.

23. Since the price signal was capped, there is a gap between the annual target emission reductions for 2050 (231 Mt) and what each of thepolicy packages delivers given the emission price assumptions.


29

There is, currently, uncertainty regarding the extent to which lower-cost emission reductions willbe available internationally. That said, the NRTEE analysis supports policy that enables access tointernational purchases of real emission reductions, whereby such reductions reduce the domesticcost burden.

In conclusion, if deep long-term GHG emission reductions are to be achieved, the federalgovernment needs to send a clear, consistent and economy-wide policy signal that places a priceon GHG emissions sooner rather than later. The only effective and efficient policy that wouldresult in deep GHG emission reductions is a market-based policy, such as a tax, a cap-and-tradesystem or a combination of the two. These mechanisms are the most effective and efficientmeans to send a signal throughout the entire economy. This core policy then needs to becomplemented by other regulatory policies, which may force emission reductions from parts ofthe economy that do not respond to a price policy. Strategic investments in infrastructure andR&D investments will also be necessary. Offsets would be phased out over time as the price signalis transmitted more broadly in the economy.

Policy Sequencing and the Transition

The NRTEE’s conclusion that a market-based policy applied broadly throughout the economy,complemented with other targeted policies such as regulations, is supported by previousNRTEE research.24 These previous reports also conclude that policy design is critical and is amajor determinant of important policy outcomes such as economic efficiency, environmentaleffectiveness, political acceptability and administrative feasibility. While there are policy trade-offs among these important considerations, a package of emission reduction policies designed tobalance these considerations has the best chance of success.

We now add to these observations the importance of sequencing policy to ensure a successfultransition. Any emission price policy implemented in the medium term (2020) will need todovetail with the government’s currently proposed domestic emission trading (DET) systemfor the large emitters. It is therefore reasonable to consider the DET as a starting point forpolicy sequencing to the long term. Issues that will have to be addressed include expandingthe sectoral coverage to bring in more emission sources (it currently covers about only 50%of national GHG emissions), and ultimately moving from an intensity-based system toabsolute binding caps.

Given the pricing options we have evaluated, our research indicates that either (1) anupstream-cap-and-trade (UCT) system will need to replace the DET, or (2) a complementary

24. Cairns, S., 2006. “Long-term Energy And Climate Change Strategy: Advice on Scoping of Phase II Research, Wrangellia Consulting.Final Report submitted to the National Round Table on the Environment and the Economy”; Marbek Resource Consultants, 2006,“Long-term signals for deep greenhouse gas emission reduction,” Final Report submitted to the National Round Table on theEnvironment and the Economy; MK Jaccard and Associates, 2006. “Advice on a long-term strategy on energy and climate change:Phase 2,” Final Report submitted to the National Round Table on the Environment and the Economy.


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emission tax be added to the DET. In the first instance, the broad-based emission price willnecessarily involve expanding trading from the downstream to the upstream. This would meanthat the currently proposed intensity-based system would have to move upstream to energyimporters and producers sooner rather than later.

Alternatively, in the second instance, we see an opportunity to treat an emission tax and theDET system as complements since our analysis reveals advantages and disadvantages of bothpolicies. Importantly, a major strength of an emission tax is to achieve a wide breath of coveragein the uncovered sectors. Administrative ease, price certainty and low transaction costs furthersupport the case for a complementary emission tax. We observe therefore that there are goodreasons to consider implementing an emission tax concurrently with the DET system.

In addition to considerationof the pricing policy shifts, thesequencing of the complementarypolicies will also need some attention.First, the current slate of regulationswill need to be expanded to morefully address sectors such as trans-portation and buildings. Supportfor research, development anddemonstration programs willbe important so that innovation canoccur and technology can be deployedas soon as possible. Finally, strategicinfrastructure investments will needto be made as soon as possible, andwill necessarily need to increase aswe move out to 2020.

As we move forward in time, sequencing will require that the stringency of all policies beincreased. An adaptive management approach will need to be adopted so that progress is monitoredand policies are adjusted to match the required level of abatement effort, and also to minimizeand mitigate adverse outcomes on certain groups or regions. Adaptive management is a systematicprocess for continually improving policies and practices by learning from the outcomes of operationalprograms. Essentially, it is the integration of design, management and monitoring of policiesand programs to regularly verify their effectiveness in order to learn and adapt accordingly.

While we point to some initial observations regarding the transition from the short- tothe medium-term policy regime, we are careful to note again that we have not evaluated thefederal government’s proposed regulatory plan, and that these are general observations arebased on our current research agenda. This transition is an important consideration for the

“An adaptive management approach

will need to be adopted so that

progress is monitored and policies

are adjusted to match the required

level of abatement effort, and also to

minimize and mitigate adverse out-

comes on certain groups or regions.”


31

2.1.5 Technology Deployment Will Be Imperative

When we contemplate the deep GHG reductions it becomes apparent that the scale and scopeof the necessary technology deployment is significant and perhaps unprecedented in the modernindustrial era. This leads to our key “technology” observation that attaining medium- and long-termtargets will require widespread deployment of low-carbon technology in all segments of the economy.This assertion is supported by previous NRTEE work in 2006,25 which concluded that deep GHGemission reductions are attainable from a technological standpoint using existing and foreseeablecommercially available technology (CCS falls within the latter category).

Figure 7: GHG reductions “wedge” for 20% reductions by 2020 and 65% reductions by2050 (as demonstrated through the “fast start” scenario)

25. National Round Table on the Environment and the Economy, 2006, “Advice on a Long-term Strategy on Energy and Climate Change.”Ottawa.

Note: CCS represents the carbon capture and storage wedge. CCS/EE represents the carbon capture and storage (CCS) and energyefficiency (EE) overlap. The fuel switching wedge represents the contribution of switching from coal to oil products to natural gasto electricity; this portion also includes the contribution of renewables (wind, hydroelectricity, etc.) and nuclear power. The outputwedge represents the GHG reductions due to lower physical output.

design and implementation of the medium- and long-term policies and therefore requirefurther investigation.


32

26. CIMS represents the economy’s input and output based on energy supply, energy-intensive industries, and key energy end-uses in theresidential, commercial/institutional and transportation sectors. Technologies are limited to those foreseen as likely to become commerciallyavailable in the time frame of the analysis.

27. See Section 5.5 for a discussion of the attributes and assumptions of CIMS.28. The NRTEE’s 2006 report “Advice on a Long-term Strategy on Energy and Climate Change” identified more specifically a number of

areas where emission reductions could occur, such as energy efficiency, CCS, renewables, biofuels and nuclear energy.

Our current work supports the assertion that there are technologically feasible opportunitiesin areas such as energy efficiency, switching fuels to less carbon-intensive sources, CCS andoverall demand reductions (output such as energy conservation and activity such as kilometrestravelled).26 Figure 7 provides an overview of the scale of the technology deployment that underpinsthe emission reductions in our fast and deep pathway.27 Each wedge indicates the technology effortrequired from current levels to attain the deep long-term reductions.28

While our knowledge, modelling and intuition tell us that technically we possess the capacity toachieve substantial emission reductions, there are some important risks or barriers to deployment:

• Technologies such as CCS are largely untested on a massive scale, yet represent a significantabatement opportunity. While small-scale CCS has been proven, the scalability of thesesmall initiatives is untested. Importantly, technology demonstrations and infrastructureinvestments are required sooner rather than later to move the knowledge base forward on CCS.

• The enabling conditions for large-scale technology deployment are not fully developed; there is aneed to develop a supportive public policy framework and new regulatory systems, and to removeexisting regulatory barriers. Both of these speak to a need for governments to systematicallyseek ways to reduce impediments to the private sector deploying low-carbon technologywhile at the same time implementing new processes to facilitate deployment.

• There may be development bottlenecks in terms of technology, labour and material availability suchas those currently experienced by the upstream oil and gas sector in Alberta. Year over year,growth rates in ethanol and other biofuels will also need to climb steadily, raising importantquestions about scalability and non-GHG air impacts such as increased particulate matter.Planning for these bottlenecks then becomes an important task for governments and theprivate sector alike.

• The scope of the required technology deployment in virtually all areas of the economy limits thereliance on a technology silver bullet that can emerge and then solve the problem. The 40-yearperiod may be too short for significant technological breakthroughs to permeate theeconomy fully and thus radical backstop technologies are unlikely, even with high emissionprices that trigger significant R&D and innovation.

• Behind the technology deployment story is the need to make choices. Individual choices will need tochange or be changed to stimulate the necessary widespread investments in low-carbon


33

2.1.6 Air Pollutant Reductions and an Integrated Approach

Air pollutants, including VOCs, SOX, NOX, and PM29 (individually or in combinationas smog and acid rain) have been shown to cause adverse health and environmental effects.Scientific evidence indicates a strong correlation between ambient air concentrations of thepollutants and significantly adverse effects on human health, ranging from respiratory conditionssuch as asthma and chronic bronchitis to premature death and increased mortality. From anenvironmental perspective, smog has been linked to reduced plant productivity resulting inreduced agricultural crop yields and forest growth. Acid rain and acid deposition from SOX

and NOX emissions also present a well-known threat to ecosystems, notably lakes and forests.

The NRTEE looked at potential long-term (2050) national emission reduction targets for anumber of air pollutants including SOX, NOX, VOCs and PM. Specifically, we assessed potentialemission reductions of 50% and 80% below current levels. We also looked at an integrated approachwhereby significant GHG and air pollutant emission reductions could be addressed in the sametime frame (using a 65% GHG reduction target and 50% reduction targets for the air pollutants).The goal of this integrated analysis was to assess the integrated effects between the pricing pathwaysfor the two GHG targets while incorporating any co-benefits and integrated effects of the shallowprices for the air pollutants. We explored to what extent we could take advantage of the co-reductionsto reduce the GHG prices and still meet a 65% GHG reduction target.

The following section first discusses the findings of the air pollutant analysis, followed by adiscussion of the conclusions of an integrated approach.

Air Pollutant Reductions

As with GHG emissions, anthropogenic air pollutant emissions, result primarily from fossilfuel combustion. However, air pollutant emissions differ in three important ways. First, theyhave the greatest effect in the local area around the emissions’ source. Second, most air pollutantshave a fairly short residence period in the atmosphere, so impacts can vary significantly overtime. Finally, while combustion-based GHG emissions can be linked closely to the amount of fossil

29. Airborne particulate matter (PM) consists of many different substances suspended in air in the form of particles (solids or liquiddroplets) that vary widely in size. The size of the particles determines the extent of environmental and health damage.

technologies. This places onus on governments to enable the change through emission pricing andcomplementary policies, and on individuals to make low-carbon technology and lifestyle choices.

These considerations point to a technology deployment risk that will require more than aneconomy-wide emission price to ensure success. Indeed, it will be a requirement of government tosystematically address these important enabling conditions to support and foster widespreadlow-emission technology deployment that deep emission reductions require.


34

fuel combusted, combustion-based air pollutant emissions can vary greatly depending on conditionsby sector, fuel quality and end-of-pipe emission controls. As a result of these differences the forecastsgenerated in the modelling undertaken for the NRTEE should be considered indicators of overalltrends, rather than precise values.30

Based on our research into potential air pollutant reductions the NRTEE makes thefollowing observations:

• Reducing NOX and SOX emissions by up to 50% by 2050 is achievable with a relativelymodest emissions price signal. However, with PM and VOCs, high process level emissionsmake these deep reductions very costly.

• To achieve reductions in the order of 50% in PM, the research indicates that the only option toattain deep emission reductions is to reduce industrial output in some sectors, notably oil sandsand mining. This is because major portions of reductions are process related with no knownmitigation actions. Reducing output is a very high cost option for reducing emissions, and leadsus to conclude that reductions of PM in the order of 50% are prohibitively expensive.

• For VOCs, targeted regulations may be required given the large number of very smallsources and the high process level emissions for which control technologies are not effective.

• Achieving very deep reductions beyond 50% requires a much higher price signal. For example,the emissions prices required to reach the very deep target (80%) for both NOX and SOX

are about six to ten times greater than the price required to reach the deep target (50%).This suggests that the marginal costs of reducing NOX and SOX emissions will increasesubstantially if policy makers wish to reduce these air pollutant emissions by 80%.

The research suggests that the sectoral implications of significant, long-term emission reductionsare not uniformly distributed. The transportation sector is responsible for a large portion of thereductions of NOX, PM10 and VOC emissions. However, these reductions are largely the result ofregulations set to be implemented in the near future, and therefore will occur regardless of (and notbecause of) the emissions prices.

The allocation of the remaining emissions reductions is highly dependent upon the air pollutant inquestion. In general, the sectors that contribute the most to reductions had high emission rates in 2005and lower marginal costs of abatement. For example, reductions in SOX emissions are highly concen-trated in the electricity generation sector, which contributes 26% of the 2005 levels assumed in themodel, and has a relatively low marginal cost of abatement. In some sectors, the emissions price isinsufficient to cause a reduction in emissions from 2005 to 2050. For example, the petroleum crude

30. The national forecast that was used in this analysis provides a useful indicator for potential health and environmental effects fromair pollutant emissions, but it is not sufficient to accurately measure these outcomes, which can only be determined by detailedanalysis at a regional level.


35

extraction industry experiences an increase in SOX emissions from 2005 to 2050 when the national -50% price is implemented, simply because overall activity increases almost five-fold. In these cases, theemissions price is not large enough to offset the emission effects of increased output from the sector.

An Integrated Approach

Industrial emissions of GHGs and air pollutants each account for approximately 50% ofCanada’s total air emissions and share many common sources. Therefore it makes sense toexplore the possibility of addressing both sources in an integrated regulatory approach.

The first finding of this assessment is that an integrated approach lowers the prices associated withemission reductions. Specifically, the research shows that the GHG price necessary to hit the -65%target is significantly lower when implemented along with air pollutant prices, than when the GHGprice is implemented alone (Figure 8). The air pollutant prices encourage investment in higher effi-ciency and lower emissionstechnologies and processes, andtherefore the GHG prices do nothave to be as strong to hit the target.This finding confirms that the GHGco-pollutant reduction experiencedwith air pollutant pricing effectivelyreduces the final GHG price neededto reach the target.

Many actions that reduce GHGemissions also reduce air pollutant emissions. For example, climate change policies focused onimproved energy efficiency also will lower air pollutants associated with producing energy, therebyimproving local air quality. The use of CCS eliminates most SOX and PM emissions associated withcombustion. Fuel switching from coal to natural gas will decrease air pollutant emissions. Similarly,policies targeting air pollutants, especially SOX, encourage fuel switching from relatively sulphur-intense (and GHG-intense) coal to less sulphur-intense (and GHG-intense) natural gas and electricity.

The second key finding of this analysis was that an integrated approach will likely result inco-benefits related to air pollutant reductions. For example, our research shows that the SOX

price that attains a 50% reduction when implemented alone triggers a reduction of 83% whenimplemented in conjunction with the GHG and other air pollutant emissions charges.

In conclusion, the NRTEE research suggests that there are significant opportunities toreduce GHG and air pollutant emissions in an integrated approach. The application of relativelyinexpensive air pollutant emission reduction actions, induced by emissions pricing, may significantlyreduce the GHG emission price necessary to achieve deep targets, while reaping the co-benefitsof lower local air pollution.

“The first finding of this assessment

is that an integrated approach

lowers the prices associated with

emission reductions.”


36

Figure 8: Comparison between the GHG prices required to reach the -65% GHGtarget when the GHG price is implemented alone, or in conjunction withair pollutant prices

2.2 Understanding the Economic Risk and Uncertainties of the Transition

A key question for Canada’s policy makers, and indeed all Canadians, is what effect a deep GHGemissions reduction pathway could have on Canadians and the Canadian economy. Of primaryconcern are economic growth, and regional and sectoral prospects. Energy price impacts on house-holds are also of interest. The NRTEE research indicates that the overall effects on economic growthover the long term are quite limited. However, this masks important regional and sectoral implicationsthat are not uniform in time or proportionate in scale. There are other areas of macroeconomicimpact that we did not assess and that clearly need to be investigated to more fully articulate thelikely effect of deep GHG emission reductions. The following discussion explores these two points.

2.2.1 Long-term National Economic Growth Prospects

While all forecasts of economic growth are inherently uncertain, Canada can neverthelessexpect that the size of the economy will more than double between now and 2050. Currentgrowth projections, accounting for demographic trends, immigration and productivity changesall point to continued prosperity for Canada through mid-century with annual economicgrowth averaging in the order of 1.5% to 2%.31 An important question is how deep carbonreductions may alter this prosperity.

31. A national long-term economic forecast was developed by Informetrica for the NRTEE.


37

With a climate change policy that enables cost-effective emission reductions through broad-based emission pricing and in a world where Canada’s major trading partners undertake similardeep GHG emission reductions, it is reasonable to conclude that Canada’s economy will continueto thrive with a relatively limited impact on economic growth. This assertion holds for a varietyof assumptions about the pace of economic growth as well as the pace and depth of emissionreductions (i.e., our modelled pathways). The assertion does not hold, however, if Canada actsalone and out of step with its major trading partners.

Figure 9, below, provides an overview of the possible magnitude of the impact on nationaleconomic growth that may be expected under alternative pathways for a 65% reduction belowcurrent levels in 2050.32 While recognizing the uncertainty in these long-term projections, weconclude that the economy will continue to grow, albeit at a slower pace in certain periods.

Specifically, our modellingimplies that over this period aboutone to two years of economicgrowth may be “lost” due to a climatechange policy that seeks deep GHGreductions. This means that withthe economy growing at an annualrate of about 2% between now and2050, one to two of these years ofgrowth will be lost over the entire43-year period. In effect, the likelyimpact on economic growth is lim-ited and not significant under our modelled pathways. The reduction in the size of the economywould be smaller for a lower target, such as 45%, and higher with deeper domestic reductions.It also seems plausible that having access to international trading with emission reduction costsbelow domestic levels, the impact on economic growth would be lessened even more.

Figure 9: Comparison of changes in total GDP to 2050 (in 2003 dollars)Fast and Slow Start to 65% reduction (from current levels) in 2050

“Specifically, our modelling implies that

over this period about one to two

years of economic growth may be

“lost” due to a climate change policy

that seeks deep GHG reductions.”

GDP in 2011($trillion)

GDP in 2050($trillion)

Years of lost growthbetween now and 2050

BAU ~$1.441 ~$2.968

Slow start (-65%) ~$2.934 ~2

Fast start (-65%) ~$2.957 ~1

32. See Section 5.5 for a discussion of how these economic impacts were calculated by CIMS.


38

While the eventual size of the economy could be somewhat similar under the alternativepathways, our assessment found that the annual fluctuations in gross domestic product (GDP)will likely not be uniform between 2011 and 2050 or between the pathways. The bulk of thetransitions and possible dislocations occur around 2030, with the economy restabilizing at aboutforecast levels along its new less-GHG-intensive path by 2050. With an early start, fewer transitionalfluctuations occur before 2030 but are later intensified. Conversely, with a fast start, the fluctuationsare more pronounced before 2030, but then ameliorate with time. This implies that under a faststart pathway more economic dislocation can be expected in the medium term with the gain ofa higher overall level of economic activity in 2050. Thus, the chosen pace of emission reductionswill most likely involve a trade-off between medium-term transitional impacts (such as dislocations)and longer-term economic growth.

We acknowledge the following important caveats about these predictions of GDP impact.The model used is not a general equilibrium model, and focuses mostly on key energy-consumingsectors of the economy. Implicitly, the model assumes that other economic activity is unaffectedby policies. Furthermore, the model does not capture the effects of a GHG policy on the labouror capital markets. Therefore, these estimates of GDP should be interpreted as the impacts oneconomic activity that would occur if the activity from sectors excluded from CIMS is heldconstant. In reality, a climate policy is likely to have feedback on activities excluded fromCIMS. Finally, although GDP is used as a standard measure of the change in economic activity,it is not a direct measure of the change in human welfare. Finally, our findings say little aboutother important macroeconomic effects such as income, savings and investment trade-offs forlow-carbon technologies, capital formation, changes in prices and employment.

2.2.2 Regional and Sectoral Outcomes

The apparently small impacts on national economic performance under a broad-based carbonprice mask regional and sector implications that may be of greater concern. Understanding thereal or perceived distribution of impacts on regions and sectors is important since it tends todrive climate change policy in Canada. Where real income or employment effects are forecasted,the appropriate climate change policy response is to maintain the carbon “signal” and designcomplementary income and employment policies to smooth the transition and minimize dislocation.With this in mind, the following discussion explores regional abatement efforts, sectoral priceand output effects, and costs to consumers. Again, the NRTEE recognizes the uncertainty inherentin our analysis, and therefore the following should be viewed as directional at best.


39

Regional abatement effort could ultimately be uniform but will differ in time:

• Regions will transition differently over time in response to emission pricing, with sometaking action early and some later. Under a 65% reduction scenario, all regions ultimatelycontribute reductions more or less proportionate to their baseline emissions over thelong term (See Figure 10). However, in the medium term, some provinces move first inresponse to the price signal, like Alberta and Saskatchewan, which would reduce abouttwice as much as the other provinces by 2020.

• Regions with the higher levels of emissions contribute more to the national reductiontarget. Since Ontario and Alberta emit more GHG emissions, they reduce more totalemissions, with Ontario accounting for about 20% of the national reductions andAlberta about 45%.

Figure 10: Provincial GHG emission reduction effort for 20%/65%. Share of nationalreductions and below regional baseline

Sectoral abatement effort will likely not be uniform over time with some acting earlier thanothers. Notably, the industrial and energy supply sectors would likely provide more emissionreductions by 2020, but in 2050 there could more or less be a convergence as the residential,transportation and commercial sectors catch up in response to the higher emission prices. Figure11 provides the distribution in time of abatement effort by sector. The different responses of thesectors in terms of timing and magnitude point to the need for a flexible climate change policysignal, such as the emission price we have advocated in this Advisory Report.

2020 Baseline -20% in 2020 2050 Baseline -65% in 2050

Share ofNationalEmissions

Share ofNationalReductions

ReductionsbelowBaseline

Share ofNationalEmissions

Share ofNationalReductions

ReductionsbelowBaseline

British Columbia 12% 9% -14% 10% 9% -58%

Alberta 36% 48% -24% 43% 43% -66%

Saskatchewan 6% 10% -27% 5% 6% -72%

Manitoba 2% 1% -13% 1% 1% -61%

Ontario 27% 20% -14% 27% 27% -66%

Quebec 11% 7% -13% 9% 9% -64%

Atlantic 6% 5% -14% 5% 5% -66%


40

Figure 11: Sectoral abatement effort

Sectoral profitability impacts and possible economic dislocations seem plausible under either a45% or 65% reduction scenario, even when we assume that the world (and especially theUnited States) acts in concert toreduce GHG emissions. The extentto which domestic firm output mayfurther decline and profitabilityeffects intensify will be a function ofhow much product prices rise relativeto international competitors. Thelogic of this assertion is straightfor-ward and starts with the impact ofthe emission price on productprices. In domestic markets withlittle international competition,Canadian firms face the sameemissions price with impacts differ-entiated by the relative abatementcosts and emission intensities, wherehigher carbon-intensity firms face higher costs and possibly lower market shares. In this case, themajor determinant of the profitability or economic impact will be any reduced demand for the

Canada2020 2050

-20% -65%Residential -15% -70%Commercial/Institutional -13% -64%Transportation -7% -61%Total Industrial -17% -64%

Chemical Products -13% -67%Industrial Minerals -36% -75%Iron and Steel -6% -54%Non-Ferrous Metal Smelting -5% -49%Metals and Mineral Mining -9% -37%Other Manufacturing -14% -66%Pulp and Paper -32% -71%

Energy Supply -26% -68%Coal Mining -3% -13%Electricity Generation -23% -72%Natural Gas Extraction -10% -33%Petroleum Crude Extraction -41% -69%Petroleum Refining -14% -75%

“But if countries do not move in

concert and Canada imposes deep

limits on emissions, there will be

more pronounced competitiveness

impacts leading to profitability

reductions.”


41

Figure 12: Impacts on production costs and output

Figure 12 traces out some of the possible price and output outcomes under our scenariowhere Canada acts with the industrialized world on deep reductions. With emission pricingunder this scenario, we would expect the domestic energy system to move toward less carbonintensive energy sources. This is indeed observed in our modelling with significant growth inlow-emitting sources of electricity (+40% from business-as-usual projections) and large reductionsin carbon-intensive refined petroleum products (-50%) and coal (-20%). Figure 13 presents theassociated fuel supply and demand under a long-term 65% reduction scenario.

The output of oil and gas remains more or less unaffected in our scenario reflecting theobservation that continued global demand for oil will drive energy exports, even under globalemission constraints and rising domestic production costs. If coal and petroleum product

Changes in Production CostsRelative to the BAU

Changes in Output Relativeto the BAU

2020 2050 2020 2050Residential 6% 1% -8% -5%Commercial/Institutional 1% 1% -2% -2%Transportation 8% 1% -6% -5%Industrial

Chemical Products 17% 15% -6% -5%Industrial Minerals 24% 20% -49% -50%Iron and Steel 9% 13% -3% -4%Non-Ferrous Metal Smelting 7% 7% -3% -2%Metals and Mineral Mining 3% 6% -2% -7%Other Manufacturing 5% 5% -1% -1%Pulp and Paper 2% 2% -6% -2%

Energy SupplyCoal Mining 25% 93% -6% -20%Electricity Generation 31% 24% 6% 35%Natural Gas Extraction 19% 39% -4% -9%Petroleum Crude Extraction 30% 34% -3% -5%Petroleum Refining 6% 6% -12% -50%

product, for example a reduction in national coal demand as identified in Figure 12 below. Forsectors exposed to international competition, either in domestic or international markets, theimpact will be more strongly linked to relative emission prices between countries. If all countriesmore or less act in concert on emission pricing, competitiveness impacts largely disappear. But ifcountries do not move in concert and Canada imposes deep limits on emissions, there will bemore pronounced competitiveness impacts leading to profitability reductions.


42

exports follow this possibility, the output declines we observe in Figure 13 could be reduced.That said, there would then be the associated issue of rising global emissions (or leakage) withmore Canadian energy exports.

The reduction in output from industrial sectors, either in response to higher energy prices or asan abatement option, could be small on aggregate. Our modelling suggests decreases in the order of3% below forecast levels in 2020 and 4% in 2050. Some sectors, like pulp and paper, may investearlier and experience transitional output reductions that are largely reduced over time. Other sectorssuch as metals and mineral mining may make investments later in response to higher emission prices.The one exception to this story of a low overall output effect is industrial minerals, which primarilyincludes cement. This sector could experience large output reductions due to high abatement coststhat raise product prices significantly (i.e., 30%), thereby reducing demand.

For the most part, the provincial and national stocks of housing remain stable, with somemedium-term reductions in 2020 but a return to BAU forecasts by 2050. The quantity ofcommercial buildings and the transport sector remain unaffected in terms of size but insteadwould need to lower their carbon intensity considerably.

Figure 13: Change in energy mix by sector

Residential Transportation

2020 2050 2020 2050

Natural Gas -4% -6% RPPs -1% -57%

RPPs* -5% -28% Electricity 0% 11%

Electricity 9% 35% Hydrogen 0% 5%

Wood 0% 0% Renewable 0% 40%

Industrial Electricity

2020 2050 2020 2050

Natural Gas -3% -6% Natural Gas 4% 8%

Coal 0% -1% Coal -11% -29%

RPPs -6% -19% RPPs 0% -2%

Electricity 4% 18%Renewable 7% 23%

Wood 5% 7%

*Refined Petroleum Products


43

For the average household, price effects can be expected, with both “pain” and “gain” associatedwith deep GHG reductions. But these price effects are likely not outside the ongoing energyprice swings we have experienced, and thus increased energy costs for households are probablyimportant but not significant:

• Electricity price increases for households could be expected in carbon-intensive provinces,such as Alberta and Ontario, in the order of 50% by 2050. Electricity price effects in otherprovinces would likely be lower. For space heating and domestic hot water in houses, naturalgas costs could increase by about 60% by 2050, which is well below recent price swings.Gasoline prices could roughly double by 2050 from their historic level. To put this incontext, Canadian retail gasoline prices in 2005 increased by 50%, fluctuating from about$0.80 per litre to $1.20 per litre, before closing the year at about $1.05 per litre, an increaseof over 30%.

• While many energy costs would increase, there could also be savings for households.The combined effect of building regulations that increase energy efficiency and emissionpricing, which increases energy efficiency and demand conservation, is that householdscould consume considerably less energy. In our assessment, total energy expenditureper household falls 15% despite the increases in price. The cost of these savings is anincrease in capital expenditure for energy efficiency actions, but the overall effect ispositive with net overall savings for consumers.

2.2.3 The Importance of the Enabling Conditions

A major observation from our assessment is that with deep reductions there will be adverse impactson regions, sector and households. The second major observation is that any deviation from our enablingconditions will intensify the possible adverse effects we envision. Thus to minimize economic costs andadverse environmental effects and successfully transition to a low-emission economy, Canada must act inthe coordinated, integrated manner we have set out in our “enabling conditions.” This means:

• acting in concert with the rest of the world on setting targets, implementing emissionpricing and trading global emissions;

• setting targets that place Canada on a path to sustained reductions, where any delay intarget attainment has environmental and economic risks;

• using broad-based emission pricing that is consistently communicated;

• enabling widespread technology deployment; and

• integrating air and GHG policies more fully.

Key Findings andRecommendations


47

Key Findings and Recommendations

Key Findings

The policies contained in the federal government’s Regulatory Framework for AirEmissions, which are largely focused on the large industrial sources of GHG emissions, arefirst steps toward achieving deep GHG emission reductions in Canada. While these policiesare focused on the near term, it is imperative for Canada to start immediately planning for atransition to the medium and long terms. This should involve the design and implementation ofeconomy-wide pricing policies that will effectively move our economy toward a low-emissionsfuture. The NRTEE’s advice and research is meant to inform the policy debate that willbegin over choosing and designing the right market-based instruments for achieving deepand sustained GHG emission reductions in Canada across our economy.

The federal government has committed to deep long-term emission reduction targets forGHGs and air pollutants. For GHGs, these targets are 20% below 2006 levels by 2020, and60% to 70% below 2006 levels by2050; these targets match those ofthe NRTEE’s “fast and deep” scenarioin this report. Achieving thisvision of a low-emission economyfor Canada requires embarkingupon a focused and deliberatetransition beyond current policyapproaches. Our research showsthat achieving the 2050 target of a65% reduction in GHG emissionsfrom current levels requires meetingthe stated 2020 target of a 20%reduction. Missing the 2020 target will put at risk the attainment of the longer-term target,or make achieving that target come at both higher economic and environmental costs. It willresult in higher cumulative GHG emissions into the atmosphere over the time period inquestion. This is significant because climate change is both an emissions “stock” and an emissions“flow” problem. Early action offers the best guarantee of maximum success at minimum cost.

The research, analysis and consultations conducted by the NRTEE over the past yearlead it to conclude that the next step for Canada on climate change is the development andimplementation of a truly national, integrated long-term plan based on the goal of attainingdeep GHG emission reductions by 2050. This plan should be based on market-based instrumentsand solutions because they offer the most effective and sustainable pathways to environmentalsuccess and economic certainty.

3

“Achieving this vision of a

low-emission economy for Canada

requires embarking upon a focused

and deliberate transition beyond

current policy approaches.”


48

Our research illustrates that deep, long-term reductions are achievable based on knownpolicy mechanisms and expected technologies deployment. The main conclusion from ourwork is that the policy package required to achieve deep long-term reductions must place aprice on carbon emissions, and needs to be complemented by other policies, such as regulationsfor certain sectors that may not respond to a pricing mechanism.

The core of this policy would establish a pricing mechanism for emissions, eitherthrough an emission tax, a cap-and-trade system or a combination of the two. To providepolicy certainty and a level of predictability, the price signal must be communicated clearly,with an expectation that the price of emissions would escalate over a scheduled time period.Attaining deep GHG emission reduction targets will have a minor effect on the long-termgrowth prospects for the economy. It will, however, cause some economic dislocation andimpact, particularly in certain regions of Canada and sectors of our economy. Over the longterm these are manageable with the right mix of policy instruments and by adopting aphased, realistic, but sustained implementation approach.

The NRTEE’s research and analysis supports a plan that addresses GHGs and air pollutantstogether in an integrated approach. Important health benefits to Canadians can be realizedby doing so. As energy-related emissions of GHGs and air pollutants share many commonsources, there appears to be value in designing and implementing concurrently integratedreduction policies and actions.

Finally, it is imperative to note that our research, the conclusions that we draw from it,and the advice that we putting forward for consideration, are based on what we know today,using known policy mechanisms, the best available modelling, and the knowledge base ofmany experts in the field of climate change mitigation and related disciplines. The state ofknowledge on this issue in general, and many of the specific aspects considered in thisAdvisory Report, is rapidly advancing. Therefore, as policies to address climate change, andemission reductions specifically, are designed and implemented, there will need to be amechanism put in place that will track the state of the knowledge to ensure that the policiesand approaches continue to be appropriate. These adaptive management practices should bebuilt into the design of the policies and approaches Canada adopts, not only to track theeffectiveness of our domestic policies, but to also monitor the policies of the internationalcommunity, and the scientific evidence that will continue to come to light on this issue over time.

Recommendations

Based on the research and analysis contained in this report and supporting documentation,the NRTEE makes the following recommendations to the federal government:


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GHG Emissions

1. Implement a strong, clear, consistent and certain GHG emission price signal across theentire Canadian economy as soon as possible in order to successfully shift Canada to alower GHG emissions pathway, achieve the targeted reductions for 2020 and 2050,avoid higher emission prices that a delay would entail, and reduce cumulative emissionsreleased to the atmosphere.

2. Institute a market-based policy that takes the form of an emission tax or a cap-and-tradesystem or a combination of the two.

3. Develop complementary regulatory policies, in conjunction with the emission price signal,to address sectors of the Canadian economy that do not respond effectively to such aprice signal or where market failures exist. Complementary policies should also providesupport for research, development and demonstration of technologies, as well as strategicinvestments in infrastructure.

4. Establish a Canada-wide plan, in the earliest possible time frame, that leads to bettercoordination of complementary federal, provincial and territorial GHG emissionreduction policies aimed at common or shared targets, time frames and actions.

5. Apply GHG emission reduction policies that incorporate adaptive managementpractices and have built-in monitoring and assessment mechanisms to allow for regularreviews to ensure efficiency and effectiveness. This approach will ensure that progress ismonitored, compliance issues are addressed, and policies are adjusted to match therequired level of abatement effort, and will minimize and mitigate unanticipatedadverse outcomes.

Air Pollutants

• Address GHG emission and air pollutant reductions concurrently to ensure maximumhealth benefits to Canadians and greater economic certainty for industry, by designingand implementing co-pollutant reduction policies in an integrated manner.

For Both GHG and Air Pollutants

• Implement, immediately, the development and design of market-based policy instruments,plus complementary policies, for Canadian environmental objectives, economic circumstancesand technology needs, following broad consultation with industry, environmental and otherstakeholders, experts and all other levels of government, drawing upon international,national, regional and local knowledge and experiences.

Looking Ahead


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Looking Ahead

In addressing the federal government’s Reference and conducting our research, the NRTEEexamined a number of important issues related to GHG and air pollutant emission reductions.However, our research, analysis and dialogue also identified a number of key emerging issuesthat require further consideration as part of Canada’s successful transition to a low-emissionfuture. In order to better understand how to make the transition so that risks are minimized,we have identified five core areas that need further detailed research and evaluation:

Knowledge

Important analytical knowledge gaps exist that need to be filled. This includes work on astandard macroeconomic forecast upon which to base future modelling work for comparativepurposes, developing technology cost curves to project effective deployment of clean energytechnologies, comparing clean energy technology experience curves with other large-scaletechnology development and deployment experiences to identify barriers to deployment, andassessing emission abatement cost curves for various sectors and technologies that offer themost potential.

Policy Design

A comprehensive climate change public policy framework based on market-based instrumentsand the deployment of technology is central to achieving deep, long-term emission reductions. Ourmodelling sets out several market-based pathways that offer real promise, yet also raise issues thatneed more detailed examination. Policy design details can demonstrably affect the effectiveness andefficiency of one pathway over another. More work is therefore required on comparing the mostfeasible market-based instruments of cap-and-trade versus carbon tax. This includes how eachshould be designed and implemented; their sensitivity to various price scenarios and revenue-raisingprojections; recycling revenue to regions, sectors, and taxpayers; tax shifting possibilities; andhow auctioning of emission permits can be undertaken. The link of each to fostering technologydeployment must also be examined. The current NRTEE research begins to explore potentialsectoral and regional effects of pricing emissions; however, the importance of these considerationswarrants further detailed exploration during the design and development of policies.

Governance and Federal-Provincial-Territorial Coordination

While the NRTEE examined emission reduction scenarios from a federal governmentperspective only, it is clear that the linkage to provincial/territorial climate change policies beingdeveloped and implemented must be considered for a truly domestic emissions perspective to beobtained. This is necessary to enhance coordination of approaches on behalf of industry andconsumers, thereby keeping costs down for both, and maximizing approaches that lead to

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greater certainty of outcomes. Given the “horizontal” nature of climate change policy,which affects many departments of government, it is also important to examine policydevelopment, governance and accountability mechanisms, as well as measure progress onachieving targets and assess areas for improvement with respect to further integration ofpolicies and reported outcomes.

Opportunities of Climate Change Action

Climate change action is not just an economic cost but offers the prospect of certaineconomic opportunities and benefits to society. Becoming a “clean energy superpower,” forexample, implies a leading innovative role for Canada in identifying, developing and deployingnew climate change technologies that can be exported or otherwise assigned value. This is animportant shift in approach that needs to be contemplated as part of an evaluation of thepotential benefits of addressing climate change.

Appendix


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Appendix

5.1 Letter of Reference from the Minister of Environment

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5.2 NRTEE Approach to the Reference

The NRTEE has prepared this Advisory Report in several stages:

November 2006 – February 2007:• NRTEE’s mandate was defined. The NRTEE scoped out a research agenda and verified

its response to the Reference with stakeholders.

February 2007 – July 2007:• Research was commissioned from experts. The research covered a range of topics, including

but not limited to pathways for long-term reductions of emissions of GHGs and airpollutants, economic implications of such reductions, feasibility of GHG emissionreduction policies, co-benefits of GHG and air pollutant emission reductions, andcomparative international approaches to emission reductions.33

January 2007 – July 2007:• Expert advisory groups vetted the main elements of the research. The NRTEE engaged

expert advisory groups to debate and validate the research approach, findings andconclusions.

June 2007:• Interim results were reported. The NRTEE presented an Interim Report to the Minister

of the Environment that summarized initial findings.

September – October 2007:• Experts and stakeholders were consulted. The NRTEE discussed the research with a

targeted number of knowledgeable and interested stakeholders in early fall, in an effortto solicit broader views and opinions on the findings and conclusions. A summary ofthese discussions is provided in Section 5.6.

October 2007:• NRTEE members endorsed the Advice. Finally, the findings and recommendations were

subjected to a thorough review and dialogue by NRTEE members.

33. See Section 5.4 for a complete list of the commissioned research studies.


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5.3 Glossary

Abatement: Reducing the degree or intensity of, or eliminating, pollution.

Airborne Particulate Matter (PM): Solid particles or liquid droplets suspended or carried inthe air (e.g., soot, dust, fumes, mist).

Business As Usual (BAU): An estimate of the trajectory that society is currently on in order totest policy impacts.

Cap-and-trade system: A regulatory program under which government sets a cap on thevolume of GHG emissions, distributes permits for allowable emissions and enables firms to buyand sell the permits after the initial distribution.

Capital Stock Turnover: The total value of stock sold in a year divided by the average value ofgoods held in stock. This ratio refers to the frequency of new investments in assets available foruse in the production of further assets.

Carbon Capture and Storage (CCS): An approach to mitigating global warming by capturingcarbon dioxide (CO2) from large point sources such as power plants and subsequently storing itinstead of releasing it into the atmosphere.

Carbon Offset Credit: A carbon offset reduces the net carbon emissions of individuals ororganizations indirectly, through proxies who reduce their emissions and/or increase theirabsorption of greenhouse gases.

Emission Pricing: An emissions “price” is a price placed on carbon emissions through theimplementation of an emissions cap-and-permit trading scheme, and/or an emissions tax.

Emissions (carbon) Tax: A fee imposed by a government on each unit of CO2-equivalentemissions by a source subject to the tax. Since virtually all of the carbon in fossil fuels is ultimatelyemitted as carbon dioxide, a levy on the carbon content of fossil fuels – a carbon tax – is equivalentto an emissions tax for emissions caused by fossil fuel combustion.

Emitters: In the context of climate change, emitters include industrial facilities that produceand release GHGs.

Fuel Switching: The use of different energy sources or fuels to achieve the same energy services.


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Greenhouse Gas (GHG) Emissions: Emissions into the atmosphere of gases that affect thetemperature and climate of the earth’s surface. The main greenhouse gases emitted due tohuman activity are carbon dioxide (CO2), methane (CH4) and nitrous oxide (N2O).

Greenhouse Gas (GHG) Tax: A tax on the unit GHG content of energy and other commodities.The level of the tax is set to induce changes that achieve a targeted level of emission reductions.

Large Final Emitters (LFEs): Industrial facilities in sectors producing an average of eightkilotonnes or more of carbon dioxide equivalent (CO2e) per facility and producing an averageof 20 kilograms or more CO2e per $1,000 gross production annually.

NOX: A generic term for mono-nitrogen oxides (NO and NO2). These oxides are produced duringcombustion, especially combustion at high temperatures. In areas of high motor vehicle traffic,such as in large cities, the amount of nitrogen oxides emitted into the atmosphere can be quitesignificant. In atmospheric chemistry the term NOX is used to mean the total concentration ofNO plus NO2.

Offsets: Actual emissions reductions, which are used to mitigate (offset) emission increases of airpollutants. In Canada offsets are usually invested in by non-regulated industries as a means toreduce their environmental impacts.

SOX: Sulphur dioxide and other sulphur oxides. They are formed during the combustion of fossilfuels and cause acidification.

Upstream vs. Downstream: Upstream is defined as the point of production and importation,whereas downstream is at the point of distribution of energy.

Volatile Organic Compound (VOC) Emissions: Chemical substances containing hydrocarbons(hydrogen and carbon atoms) that evaporate into the atmosphere.


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5.4 Research Commissioned by the NRTEE in Support of the Reference.

Pathways for Long-term Greenhouse Gas and Air Pollutant Emission Reductions. J&C Nyboerand Associates.

Demographic and Population Projections to 2050. Informetrica Ltd.

Transitioning an Emissions Trading System from Intensity Allocations to a Binding Cap.Margaree Consultants Inc.

Understanding Canada’s Emission Reduction Requirements Under Alternative ClimateStabilization Objectives and Burden-sharing Approaches Submitted. Ecofys Germany.

International Experiences in Setting Medium and Long-term Emission Reduction Targets.Wrangellia Consulting.

Emissions of Greenhouse Gases and Air Contaminants in Canada – Toward HarmonizedStrategies. ICF International.

National Interests and Other Considerations in Determining Canada’s Share of GlobalGreenhouse Gas Emissions in 2050. IISD.

What National Ambient Air Objectives Could Look Like. SENES Consultants Limited andStratos Inc.

Lessons Learned from the Canada-wide Standards Process. Cheminfo Services Inc.


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5.5 Key Attributes of the Energy Economy Model – CIMS

Key Attributes

The CIMS model, developed by the Energy and Materials Research Group at Simon FraserUniversity, simulates the technological evolution of fixed capital stocks (mostly equipment andbuildings) and the resulting effect on costs, energy use, emissions, and other material flows. Thestock of capital is tracked in terms of energy service provided (square metre [m2] of lighting orspace heating) or units of physical product (metric tonnes of market pulp or steel). New capitalstocks are acquired as a result of time-dependent retirement of existing stocks and growth instock demand. Market shares of technologies competing to meet new stock demands aredetermined by standard financial factors as well as behavioural parameters from empiricalresearch on consumer and business technology preferences. CIMS has three modules – energysupply, energy demand, and macro-economy – which can be simulated as an integrated modelor individually. A model simulation comprises the following basic steps:

1. An exogenous base-case macroeconomic forecast initiates model runs. If the forecastoutput is in monetary units, these must be translated into forecasts of physical productand energy services.

2. In each time period, some portion of existing capital stock is retired according to stocklifespan data. Retirement is time dependent, but sectoral decline and changing inputcosts can also trigger retirement of some stocks before the end of their natural lifespans.The output of the remaining capital stocks is subtracted from the forecast energy serviceor product demand to determine the demand for new stocks in each time period.

3. Prospective technologies compete for new capital stock requirements based on financialconsiderations (capital cost, operating cost), technological considerations (fuel consumption,lifespan) and consumer preferences (perception of risk, status, comfort), as revealed bybehavioural-preference research. Market shares are a probabilistic consequence of thesevarious attributes.

4. A competition also occurs to determine whether technologies will be retrofitted orprematurely retired. This is based on the same type of considerations as the competitionfor new technologies.

5. The model iterates between the macro-economy, energy supply and energy demandmodules in each time period until equilibrium is attained, meaning that energy prices,energy demand and product demand are no longer adjusting to changes in each other.Once the final stocks are determined, the model sums energy use, changes in costs,emissions, capital stocks and other relevant outputs.


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The key market-share competition in CIMS can be modified by various features dependingon the evidence about factors that influence technology choices. Technologies can be includedor excluded at different time periods. Minimum and maximum market shares can be set. Thefinancial costs of new technologies can decline as a function of market penetration, reflectingeconomies of learning and economies of scale. Intangible factors in consumer preferences fornew technologies can change to reflect growing familiarity and lower risks as a function ofmarket penetration. Output levels of technologies can be linked to reflect complementarities.Personal mobility provides an example of CIMS’ operation. The future demand for personalmobility is forecast for a simulation of, say, 30 years and provided to the energy demandmodule. After the first five years, existing stocks of personal vehicles are retired because of age.The difference between forecast demand for personal mobility and the remaining vehicle stocksto provide it determines the need for new stocks. Competition among alternative vehicle types(high and low-efficiency gasoline, natural gas, electric, gasoline-electric hybrid, and eventuallyhydrogen fuel cell) and even among alternative mobility modes (single-occupancy vehicle, highoccupancy vehicle, public transit, cycling and walking) determines technology market shares.The results from personal mobility and all other energy services determine the demand for fuels.Simulation of the energy supply module, in a similar manner, determines new energy prices,which are sent back to the energy demand module. The new prices may cause significantchanges in the technology competitions. The models iterate until quantity and price changes areminimal, and then pass this information to the macro-economic module. A change from energysupply and demand in the cost of providing personal mobility may change the demand forpersonal mobility. This information will be passed back to the energy demand module,replacing the initial forecast for personal mobility demand. Only when the model has achievedminimal changes in quantities and prices does it stop iterating, and then move on to the nextfive-year time period.

CIMS’ technology data are collected and reviewed in collaboration with the CanadianIndustrial Energy End Use Data Analysis Centre (CIEEDAC), an independent data collectionand analysis agency co-funded by the Canadian federal government and industry associationsand the other residential, commercial and transportation sectors DACs across Canada. CIMS’technology competition behaviour parameters are researched and established in cooperation withthe Energy and Material Research Group of Simon Fraser University; the key parameters inCIMS are set using revealed and stated preference discrete choice studies, and literature reviewwhere necessary.


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Key Scenario Assumptions

Several key scenario assumptions were required to run CIMS for this project. These includethe following:

• The population and economic growth forecasts. The growth forecasts are based onNatural Resource Canada’s Canadian Economic Outlook (CEO) 2006 and Informetrica Ltd.long-run population forecast. Besides overall output, the assumptions about industrialstructure were taken from CEO 2006.

• Starting energy prices for natural gas, electricity, coal, gasoline and other refined petroleumproducts. Theses are directly taken from the CEO 2006, except for coal, which is fromthe United States Energy Information Administration (EIA). We also adjusted coal priceto reflect regional markets.

• The costs of carbon capture and storage (CCS). CCS technology, while proven for otherapplications, has not yet been implemented on a large scale. All the CCS cost informationis based on the IPCC (2007).

• The presence and absence of international trading in emissions credits, and their clearingprice. These scenario conditions have very large impacts on the final results.

• The world clearing price of crude oil. We used the EIA price, which was US$45/barrelin 2000 out into the future.

• The world price of oil stays high enough to support growth in oil sands. Oil sandsgrowth is a major component of Canada’s future emissions, and is highly contingentthat the world oil price remains above about US$35/barrel over the entire forecast period.

• The world, including the United States, is also imposing carbon emission pricing.Implicit in our macroeconomic assumptions is that our trading partners and competitorsare also experiencing significant carbon emission pricing, removing the incentive toswitch to other suppliers. If we were imposing carbon emission pricing alone, the macroeffects would have been stronger. The remaining macroeconomic response representsthe overall substitution by consumers of our carbon intense products away from carbonintense goods.

• The energy end-use and supply technology options in CIMS represent a reasonableprediction of the set that could make up a significant portion the energy-using capitalstock during the forecast period. In other words, the model is not missing technologicaloptions that could take over a significant portion of the capital stock between now and2050. While it is certain new technologies will emerge that do not currently exist in


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CIMS, especially under the influence of carbon emission pricing, these must first passthrough the stages of invention, refinement, commercialization, and finally purchasebefore they can constitute a significant portion of the capital stock.

• In the policy scenarios an infinite amount of capital is available at the going interest rate(a commonly held assumption for Canadian Computable General Equilibrium models),and wage rates are unaffected.

Please visit the Energy and Materials Group website for further documentation of CIMS,www.emrg.sfu.ca.


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5.6 Messages from Regional Meetings Across Canada

Why the Consultations Were Important

The NRTEE’s research is based on more than just modelling and analysis. From the initialscoping of the research approach, to testing and vetting the research and conclusions, we soughtinput from a broader spectrum ofstakeholders, including environmentalexperts and industry representativesfrom across Canada. We also initiatedcross-country meetings inSeptember and October 2007 witha targeted set of individuals whopossess detailed knowledge on climateand clean air policy in Canada. Intotal, we met with 65 individuals in Halifax, Montréal, Ottawa, Toronto, Calgary andVancouver. Typically ten to fifteen people participated in each session to keep the discussionsmanageable. Below is an overview of what we heard and how it influenced our advice.

What We Heard

Given the scale of the proposed targets and the associated required action and outcomes, weheard a great deal from participants. A major theme that emerged was uncertainty: uncertaintyin what we assumed, uncertainty about its importance, in the targets and what others are doingglobally, uncertainty on the required level of reductions, on technology deployment, lifestylechange and policy effectiveness. Indeed, participants told us that there is a great deal leftunknown and that given the scale and scope of the proposed abatement effort, the risks of anunsuccessful transition to a low-carbon future are correspondingly large. As one participantnoted “there is a fundamental question of uncertainty, risks and therefore a need to manage therisks associated with transition.” This widely held view supports and indeed strengthens ouradvice that Canada needs to successfully manage the transition.

The following discussion provides a summary of some major themes we heard repeatedly.

On the modelling, there was a widespread questioning of modelling assumptions, baselinesand technologies available for reductions. Generally, there was a diversity of opinions and concernsexpressed related to the model, its feasibility and credibility, and how the results should becommunicated to the public. As on participant observed, “The devil is in the details.” In theend however, there was consensus that the modelling provided valuable insight into the implicationsof achieving the targets for 2020 and 2050. The observations of the participants reminded usthat we needed to be clear in the advice about what we assumed, and how alternative assumptionsmight change the advice.

“Our objective is to be the architect ofthis transformation.”

– A participant’s comment in Vancouver


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Canada acting in concert is a key driver of outcomes. Unquestionably, a major themeand therefore addition to the advice was a question regarding the actions of the rest of theworld. In short, what are others doing? This related to both the targets and actions of othersbut also enabling access to lower cost international emissions reductions.

There was widespread support for Canada aligning domestic action with international goals.One participant summed up this common refrain nicely:

“Canada should align its starting point and the pace of its emission reductions with othereconomies. If international partners are on a fast path, Canada should adopt a fast pathas well. If not, Canada should work slowly or risk damaging its own economy. Eitherway, the process cannot be undertaken in isolation from the rest of the international community.”

A related point, brought forward by a number of participants, is that even if Canada actsalone, there is uncertainty with respect to the improvement in the atmospheric stock of carbon:

“As Canada’s share of global emissions is only 2%, nothing that Canada does in isolation,not even 100% [reduction], will stabilize the climate.”

This reasoning was not, however, brought forward as a reason to go slow or to avoidabatement entirely. Instead, there was widespread caution about misaligning abatement effortwith other industrialized nations so that competitiveness impacts were minimized. For example,one participant stated:

“Canada should strive for mid-term targets, especially in relation to international partners.But important pieces of the puzzle are missing. While information on costs and timing isavailable, more evidence is needed on sectoral and regional implications, the impact of tran-sitions, and the relative impacts of short- versus moderate-term targets.”

There was also widespread support for international trading of carbon. This was supportedprimarily due to concerns over costs and perceived domestic limits on accessing possibly lowercost international purchases:

“Let’s say we can get 30% of the target internationally. What does that cost? Wouldn’t youarbitrarily force the price of carbon very high in Canada, by restricting [abatement] inCanada?”

There was a belief that the scale of the challenge needed more clarity. Here there weretwo distinct themes: technology deployment and lifestyle change. First, the question of technologydeployment was widely discussed, with some supporting the notion that technological fixes werereadily available while others disagreed entirely. Many participants agreed, however, that one ofthe report’s main messages must be to highlight the need for a significant technology shift.


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Closely allied was the notion that there is a role for government to help enable the technology.For example, it was suggested that government identify areas of intervention so that new scalable,deployable technologies become readily available “on the shelf, not the drawing board.” Thenotion of a technology risk was indeed widely held.

Second, while the NRTEE did not research the types of lifestyle changes associated with thetransition to a low carbon future, there was widespread interest in exploring the implications for“the ordinary Canadian” to explore “how we’ll live in 2050.” This was closely aligned with betterunderstanding the significance of the transformation and how to manage it. Typical observationsfrom participants included:

“I think we will have deep societal transformation anyway; attaining deep targets requirestheir careful management.”

“I don’t think Canadians can imagine—to reduce carbon that much—how much different aplace this country will be…It’s a much different Canada, at a very personal level.”

We heard that policy design plays a crucial role in implementation. Policy design was amajor focus for many participants. Simply, it is imperative that policy design enables cost-effectiveaction to attain the targets. While there was support for the NRTEE’s advice that economy-wideemission pricing is the core of cost-effective reductions, there was also strong support forcomplementary measures:

“A carbon price is absolutely necessary…but a carbon price without a technology policy is abankrupt strategy.”

“You’re making the assumption that the way to drive the [emissions] change is with a pricesignal, and I’m not convinced that that is the only means.”

Also there was widespread support for the notion that long-term policy certainty is a coreenabling condition for a successful transition. One participant commented, for example:

“You cannot have all of your action directed at the 2020 date, and then get there and ask‘What can we do for 2050, because our technology is already locked in?’ We need-long termvisibility now for 2050.”

Influencing investment decisions now for the long term was a common theme. This extendedto the air pollutant GHG policy integration, where to avoid costs the observation was made that“You do need to have a very good integrated policy about air pollutants and GHGs.”

There was demand for more resolution on the regional and sectoral detail and impact.There was a widespread call for more information on the regional and sectoral implications of


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the targets. For example, when looking at the implications of alternative slow and fast pathways,a participant commented that “this tells someone that fast and deep gets the best bang for mybuck, but when you look at it for different regions, or companies, that might not be the case —something shallow can look deep.” Providing more disaggregated detail on the implications wasindeed a widely held view. We therefore provided more detail in the final advice.

Finally, many participants stated that the benefits story is missing. Regardless of thepace of reductions, we heard that we as a country need to bring the public and stakeholdersalong. But with an incomplete articulation of what we get for the costs, there will likely be acontinued focus on the affordability and distributional impacts of long-term GHG reductions.And thus there is a real need to better articulate the benefits story. As one participant succinctlycommented:

“Not only are the costs associated with adaptation missing, but so are the benefits ofclimate change.”


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5.7 Meeting Participants — NRTEE’s Research on Clean Air andClimate Change – 2007

Expert Participants in NRTEE ResearchProgram Meetings

Christopher BatailleJ&C Nyboer and Associates

Andy BowcottEnvironment Canada

Matthew BramleyPembina Institute forAppropriate Development

Paul BurkeOPG Energy Markets

Stephanie CairnsWrangellia Associates

Nathalie ChalifourFaculty of Law, University of Ottawa

David ChernushenkoNRTEE Member; Green and Gold Inc.

Keith ChristieForeign Affairs andInternational Trade Canada

Victoria ChristieCanadian Electricity Association

Michael ClelandCanadian Gas Association

Louise ComeauSage Foundation

Hadi DowlatabadiIRES/LIGI, University of British Columbia

John DrexhageInternational Institute forSustainable Development

Ross EzzeddinNatural Resources Canada

Carolyn FischerResources for the Future

Luc GagnonHydro-Québec

Christopher GreenMcGill University

Paul HeinbeckerLaurier Centre for Global Relations

Jim HughesImperial Oil Ltd.

Eddy IsaacsAlberta Energy Research Institute

Note: Meetings were carried out over a number of months and some participants’ organizations may have changed during that time.


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Mark JaccardNRTEE Member; Simon Fraser University

Jennifer KerrEnvironment Canada

Gordon LambertSuncor Energy Inc.

Nick MacalusoEnvironment Canada

Nick MartyNatural Resources Canada

Deborah MurphyInternational Institute forSustainable Development (IISD)

Nancy OlewilerSimon Fraser University

Patrick O’NeilNatural Resources Canada

Nic RiversJ&C Nyboer and Associates

Pierre SadikDavid Suzuki Foundation

David SawyerEnviroEconomics

Tom ShillingtonShillington and Burns Consultants Inc.

Dean Stinson O’GormanEnvironment Canada

Bob StobbsCanadian Clean Power Coalition

Ralph TorrieICF International

Suzanne WhiteNatural Resources Canada

Experts Meetings on Providing Advice onNational Ambient Air Quality Objectives

Randy AngleAlberta Department of Environment

Jane BartonPatterson Consulting

Phil BlagdenHealth Canada

Michael BrauerUniversity of British Columbia

François BreghaStratos Inc.

Doug ChambersSENES Consulting Limited


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Karen ClarkOntario Ministry of the Environment

Quentin ChiottiPollution Probe

Dave EgarDLE and Associates

Aaron FreemanEnvironmental Defence

Long FuAlberta Department of Environment

John HewingsJohn Hewings -Environmental Management

John HicksRyerson University

Barry JessimanHealth Canada

Mike LepageRWDI Air Inc.

Carrie LillymanEnvironment Canada

Eric LoiOntario Ministry of the Environment

David MullinsEnvironment Canada

Angelo ProestosCheminfoServices Inc.

Tom ShillingtonShillington and Burns Consultants Inc.

Ron ShimizuRFI Group

Bob SlaterNRTEE Member; Coleman Brightand Associates

Ken StubbsGVRD

Natalie SuzukiBritish Columbia Ministry of Environment

Bruce WalkerSTOP

Colin WelburnRWDI Air Inc.

John WellnerOntario Medical Association

Experts Workshops – Discussion on aLong-Range Macro-Economic Forecast forCanada (Macro2050) – June 21 & July 10

Martin AdelaarMarbek Resource Consultants

Alain BélangerStatistics Canada

Nancy CebrykInformetrica Ltd.


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Maryse CourchesneNatural Resources Canada

Peter DalleyIndustry Canada

Ian HayhowNatural Resources Canada

Mark HolzmanCanada Mortgage andHousing Corporation

Paul LansbergenForest Products Association of Canada

Roger LewisCanada Mortgage andHousing Corporation

Nick MacalusoEnvironment Canada

Chris MatierFinance Canada

Mike McCrackenInformetrica Ltd.

David PodruznyCanadian Chemical Producers’ Association

Tony PelusoNatural Resources Canada

Benoit RobidouxFinance Canada

Stephen A. SampsonCanadian Steel Producers Association

Charles SaundersInformetrica Ltd.

Carl A. SonnenInformetrica Ltd.

Paul StothartThe Mining Association of Canada

Regional Stakeholders MeetingsToronto, ON – September 18, 2007

Jennifer BacklerOntario Ministry of Environment

Pauline BrowesNRTEE Member

Jim BurpeeOntario Power Generation

Lisa DeMarcoMacleod Dixon LLP

Don DrummondTD Bank Financial Group

Erik HaitesMargaree Consultants Inc.

Christopher HilkeneNRTEE Member;Clean Water Foundation

Bob OliverPollution Probe

Rebecca SpringPollution Probe


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Peter SteerOntario Ministry of Environment

Yasmin TarmohamedCanadian VehicleManufacturers’ Association

Dartmouth, NS – September 19, 2007

Dana AtwellNova Scotia Power Inc.

Jonah BernsteinGovernment of Nova Scotia

Daisy KidstonNova Scotia Environmental Network

Judy McMullenClean Nova Scotia

Johnny McPhersonNova Scotia Department ofEnvironment and Labour

Kerry MorashNRTEE Member

James TaylorNova Scotia Power

Terry TonerNova Scotia Power

Elizabeth WeirEnergy Efficiency New Brunswick

Calgary, AB – September 25, 2007

James D. BrownShell Canada Ltd.

Paul GrissNew Directions Group

Bill HamlinManitoba Hydro

Jim HughesImperial Oil Ltd.

Rick HyndmanCanadian Assocation ofPetroleum Producers (CAPP)

Stephen KakfwiNRTEE Member

John KenneyAlberta Environment

Robert PageNRTEE Member; University of Calgary

Kathy ScalesPetro-Canada

Surindar SinghAlberta Energy Research Institute

Lynn SveinsonClimate Change Central

Don WhartonTransAlta Corporation


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Vancouver, BC – September 26, 2007

Christopher BatailleJ&C Nyboer and Associates

Warren BellGovernment of British Columbia

Janet L.R. BenjaminNRTEE Member

Hadi DowlatabadiUniversity of British Columbia

Jock FinlaysonBusiness Council of British Columbia

Stephen KakfwiNRTEE Member

Cindy MacdonaldWest Fraser Timber Co. Ltd.

Bruce SampsonBritish Columbia Hydro andPower Authority

Paul WillisWillis Energy Services Ltd.

Montréal, QC – October 1, 2007


Michael CloghesyConseil Patronal de l’Environnementdu Québec (CPEQ)

Francine DorionNRTEE Member ; Abitibi Consolidated

Caroline GélineaultHydro-Québec

Christopher GreenMcGill University

Karel MayrandUnisféra

Michael RolandUniversité Laval

Murray J. StewartWorld Energy Congress– MONTREAL 2010

Patrick TobinAlcan Inc.

Ottawa, ON – October 2, 2007

Matthew BramleyPembina Institute forAppropriate Development


Victoria ChristieCanadian Electricity Association

Melissa CreedeDelphi Group


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Jenny GleesonInternational Institute forSustainable Development

Pierre GuimondCanadian Nuclear Association

Pierre SadikDavid Suzuki Foundation

Bob SlaterNRTEE Member;Coleman Bright and Associates

Carl A. SonnenInformetrica Ltd.

Notes


Getting to 2050: Canada's Transition to a Low-emission Future

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